In light of the increasing cost of living and rising inflation, the Federal Reserve raised rates by 75 basis points in July. This was done after already having a similar 75 basis-point hike in June. The main goal of increasing Fed interest rates is to help deal with record-high inflation by encouraging people to save more and spend less. But how exactly does that affect you?
Fed Raises Interest Rates to Combat Inflation and Its Impact on Borrowing Costs
In response to the sharp rise in the price of gas, food, and other expenses over the past year, the Fed has raised its interest rate to 2.25% – 2.5%. The bump in fed interest rates is expected to make it more difficult and costly to borrow money through credit cards, mortgages, and loans.
As a result, this will slow down the economy by making consumers spend less and reducing their demand. Hopefully, this will help bring prices down in the long term as supply begins to catch up with demand. In addition, rising Fed interest rates could mean getting a better return on your savings accounts. With the rise in the cost of borrowing money, several banks have adjusted their annual percentage yields to reflect this increase.
The Potential Negative Effects of a Rapid Increase in Fed Interest Rates on the Economy
However, a rapid increase in Fed interest rates may have a negative effect on the economy in the short term. If the Fed raises the rates too aggressively, this can lead to more layoffs and higher unemployment. Also, credit card debt becomes more expensive and more difficult to pay back as the Fed rate rises. Although there isn’t a strong link between the stock market and Fed interest rates, the rate hike will result in less liquidity in the market. This could lead to investors feeling the need to exit the stock or crypto markets.
When these positive and negative effects will begin to manifest themselves depends on whether there will be other rate increases later this year. According to Jerome Powell, chair of the Federal Reserve, the fed rate is expected to rise by at least an additional 1 percentage point by the end of the year. As to when this could occur, it is possible to expect an announcement after the Fed’s next meeting in September. While these changes may be painful in the short term, the Fed believes that these interest rate hikes will lead to a healthier and more stable economy going forward.