The Fed announced a quarter-point interest rate hike at its March meeting, signaling that it would stay the course on fighting inflation despite recent fallout in the banking sector after the collapse of Silicon Valley Bank. This marked the ninth increase in roughly a year, pushing rates to between 4.75 and 5 percent.
However, the Fed's inflation-fighting effort has become much more precarious given what's going on with the banking system. While the Fed reiterated in a policy statement that the "U.S. banking system is sound and resilient," it contended that "recent developments are likely to to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation." It said that "the extent of these effects is uncertain."
What will the Fed do next?
It seems like the Fed's streak of continual rate hikes may be coming to an end, as it removed a line from its statement in March about "ongoing increases." On the whole, members of the Federal Open Market Committee (FOMC), which is responsible for setting policy, predicted just one more rate increase in 2023 by a quarter point. After that, in 2024 and beyond, the FOMC is forecasting cuts.
However, it's worth noting that the FOMC wasn't in total agreement about where things may head next. While one member thought the decision to come out of the March meeting had pushed the federal funds rate to its peak, another predicted rates increasing this year to almost 6 percent. Others forecast that rates would drop far below what they are now.
When is the next interest rate decision?
The Federal Reserve isn't slated to meet again until early May, with the next Federal Open Market Committee scheduled for May 1-2, 2023. The verdict on interest rates should arrive on Wednesday, May 3.
How do interest rates affect the economy?
The Fed uses interest rates "like a gas pedal and a brake pedal," Forbes explained. Lowering rates stimulates the economy; raising rates slows the economy down. The agency doesn't actually set the funds rate — banks do that — but "the Fed assumes that banks will use it as a floor in their own lending," Forbes added.
Rate changes usually take "at least 12 months" to have "widespread economic impact," Investopedia explained. But the stock market reacts immediately. For example, when Fed chairman Jerome Powell signaled in early March that further interest rate hikes were likely, the market went into a bit of a tailspin. The major indexes each fell more than 1 percent. Beyond stocks selling off, "Treasury yields rose and the dollar extended again after Powell's comments," Reuters reported.
The surprising collapse of SVB threw everything up in the air. Bank stocks fell, and government bond prices rose "as fund managers ramped up bets" that rates wouldn't change after the March meeting, Financial Times said. Of course, those bets were wrong. Analysts think policymakers "need to tread carefully" from here in their efforts to "hose down inflation," the paper added. Some economists blamed the Fed's "most aggressive rate-rising cycle in decades" for SVB's collapse in the first place. "The Fed is starting to break things," John Briggs, the global head of economics and markets strategy at NatWest, told The Guardian.
Others suggest that the economy isn't as sensitive to rate hikes as it once was. "Today's economy is no longer as interest-rate sensitive as that of past decades, and its resilience, while a virtue, does complicate matters for the Fed," Rick Rieder, BlackRock Inc.'s chief investment officer of global fixed income, told The Wall Street Journal.
What do rate hikes mean for your wallet?
As Kiplinger puts it, "rate hikes are a blessing and a curse for consumers." When the Fed raises rates, consumers will pay higher interest rates on debt like credit cards, home equity lines of credit, and private student loans. However, on the flipside, savings rates also tend to increase. In the face of rate hikes, Kiplinger offers the following pieces of advice:
- Pay off any debt. Aim to pay off your debt before interest rates get any higher. While the impact might feel gradual initially, continued increases ultimately can make paying off debt more challenging.
- Lock in rates if you can. For those with a home equity line of credit, consider locking in a lower rate on all of a portion of your balance.
- Take advantage of top savings rates. Finally, take advantage of increasing savings rates. Kiplinger advises consumers that they'll usually find the best rates at online banks or other online financial institutions, including the ones in the table below.
When you apply via links on our site, we may earn an affiliate commission
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com
New Tax Rules for 2023: Download your free issue of The Kiplinger Tax Letter today. No information is required from you.
