Financing Makes $ense

 

On Wednesday, the Federal Reserve unveiled its plan to increase 
the federal funds rate to 0.25% to 0.5%. 

In a statement, the Fed said the increase is part of its goal to “achieve maximum employment and inflation at the rate of 2% over the longer run.” The Fed also said that along with the interest rate increase, it “expects to begin reducing its holdings of treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.”

According to the Wall Street Journal, this will not be the last increase of this year by a long shot, reporting that the Fed has “penciled in a series of further increases this year.”

The first increase of the federal funds rate in more than three years will kick off six such moves this year, top economists say, as the central bank sets out to corral inflation that reached a 40-year high of 7.9% in February.

Keep in mind that this rate – which is what banks charge each other for overnight loans – is near zero. That means borrowing costs are at rock bottom and will still be historically low even if the Fed makes good on economists’ forecasts.

How much will the Fed raise interest rates?

The seven total quarter-point increases the Fed forecast Wednesday mark its most aggressive hiking campaign since 2005 and would leave its key rate at a range of 1.75% to 2% by year-end. Another four hikes are projected in 2023, a blueprint that would push the rate to 2.8% by the close of that year.

“Now is a good time to try to pay off debt to protect yourself from rising rates, as well as to lock in fixed rates on any new loans you might need, such as a mortgage or auto loan,” says Kimberly Palmer, a personal finance expert at NerdWallet.

The difference between the upcoming rate increases and the Fed’s last cycle, from 2015 to 2018, is that Americans are already struggling with soaring prices. During the last round, inflation was around or below the Fed’s 2% annual target. Although the rate increases are intended to slow economic growth and subdue inflation, that won’t happen right away.

As a result, consumers grappling with high prices of gasoline, groceries and rent, face yet another climbing expense.

“Rising interest rates will just be another form of inflation,” says Greg McBride, chief economist of Bankrate.com.