What the latest Fed rate hike means for the economy

Federal Reserve
(Image credit: SAUL LOEB/AFP via Getty Images)

The Federal Reserve has announced that it will raise interest rates another 0.5 percent to 4.5 percent, marking the seventh increase of 2022. This will, however, be the smallest of the last four rate hikes showing promise that the increases will slow soon.

The increase comes following the latest consumer price index report showing that inflation cooled in November. Along with the rate increase, the Fed also announced economic predictions indicating that rates will likely need to go higher to slow the economy even more, writes The New York Times. It currently predicts rates will rise to 5.1 percent by the end of next year. Unemployment is likely to increase as well.

However, despite the consistent rate hikes, the economy has stayed strong, especially the job market, which some experts predict will reach a dead end at some point. "The cumulative impact of higher rates are just beginning. Hence, the Fed has to step down its pace a bit," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

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There is concern that the hikes will cause a recession in the coming year with the rates already heavily damaging the housing markets, a key cause of inflation. "Rate cuts may be too late. Recession risks are still relatively high," commented Keith Lerner, co-chief investment officer at Truist Advisory Services, adding that "A pivot or pause is not a cure-all for this market."

Even though it's smaller, a rate increase is still an increase and people may see higher rates on mortgages, credit cards, auto loans, and student loans. In a statement, the Fed wrote that it is, "strongly committed to returning inflation to its 2 percent objective."

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Devika Rao

Devika Rao is a staff writer for The Week. She graduated from Cornell University with a degree in Environment and Sustainability and a minor in Climate Change. Previously, she worked as a Policy and Advocacy associate in the nonprofit space advocating for environmental action from the business perspective. She is passionate about the environment, books, and music.