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Here’s What The Federal Reserve’s Fourth 0.75 Percentage Point Interest Rate Hike Means For You (2 Videos)

Nov 2, 2022

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The Federal Reserve raised the target federal funds rate by 0.75 percentage point for the fourth time in a row on Wednesday, marking an unprecedented pace of rate hikes.

The U.S. central bank has raised the benchmark short-term borrowing rate a total of six times this year, including 75 basis point increases in June, July and September, in an effort to cool down inflation, which is still near 40-year highs and causing most consumers to feel increasingly cash strapped. A basis point is equal to 0.01 of a percentage point.

A policy statement after the announcement noted that the Fed is considering the “cumulative” impact of its hikes so far when determining future rate increases. Economists are hoping this signals plans to “step-down” the pace of increases going forward, which could mean a half point hike at the December meeting and then a few smaller raises in 2023. Still, stocks tumbled after Federal Reserve Chair Jerome Powell said there were more rate hikes ahead.

“Americans are under greater financial strain, there’s no question,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business and former chief economist of the Securities and Exchange Commission.

However, “as the Fed tightens, this also has adverse effects on everyday Americans,” he added.

What the federal funds rate means to you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

By raising rates, the Fed makes it costlier to take out a loan, causing people to borrow and spend less, effectively pumping the brakes on the economy and slowing down the pace of price increases.

“Unfortunately, the economy will slow much faster than inflation, so we’ll feel the pain well before we see any gain,” said Greg McBride, Bankrate.com’s chief financial analyst.

Already, “mortgage rates have rocketed to 16-year highs, home equity lines of credit are the highest in 14 years, and car loan rates are at 11-year highs,” he said.

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