Written by Sarah Foster – 6 min read – Edited By Brian Beers
The Federal Reserve’s March meeting represents a critical turning point for monetary policy: Officials are all but certainly going to raise interest rates for the first time since 2018, marking an end to the U.S. central bank’s extraordinary coronavirus crisis-era stimulus.
But it’s never been about just this one rate hike. Fed watchers will be looking for clues about the path forward, including how aggressive the Federal Open Market Committee (FOMC) is willing to get with rate increases, especially as officials juggle a variety of unknowns made even more uncertain by the conflict between Russia and Ukraine.
The ultimate question is when inflation — which popped to another 40-year high in January — will slow down. Higher price pressures for longer could convince the Fed that they need to be even more aggressive, pointing toward multiple hikes this year. But a massive surge in gasoline and food prices since Russia’s invasion could also eat away at consumers’ purchasing power, dampening demand and harming growth if it gets bad enough, giving the Fed more reason to be cautious.
“It’s all about how many more rate hikes are still to come,” says Greg McBride, CFA, Bankrate chief financial analyst. “That’s because the impact of one quarter-point hike from near-zero levels does not change much, but a series of rate hikes over the course of a year or two can have a monumental impact on the pocketbooks of households and the economy at large.”
Here’s what you need to know about the upcoming Fed meeting on March 15-16 and how it could impact you.
1. The Fed looks set to raise rates by a quarter point
Price pressures’ ugly ascent to 7.5 percent in January 2022 from 1.4 percent in January 2021 had some analysts wondering whether the Fed would make its first half point hike since 2005 at the March meeting. That’s most likely been taken off the table, including by Fed Chair Jerome Powell himself.
“I’m inclined to propose and support a 25-basis point rate hike,” Powell said during a March congressional testimony.
The war in Ukraine underscored that likelihood. Analysts say the Fed’s still bound to stick with its plans to walk back stimulus, but it’s also too soon to tell just how much the situation will impact the U.S. economy.
“It’s hard to say that the risks of a recession haven’t increased as a result of these commodity price increases,” says Gary Schlossberg, global strategist at the Wells Fargo Investment Institute. “The Fed doesn’t want to make a bad situation worse. Soft landings are kind of like unicorns. We talk about them, but they very rarely happen, if at all, and especially in this environment.”
2. After March, how many more times will the Fed hike rates — and by how much?
Beyond the Fed’s March rate hike, nothing else is set in stone. Fed officials have six more meetings in 2022, and investors expect them to hike at all of them but one, according to CME Group’s FedWatch. Economists at Goldman Sachs, however, see the Fed moving at every meeting.
Officials have been careful not to rule anything out, emphasizing that the current tightening cycle will be very different from the Fed’s last go-round at hiking rates simply because the economy is in a much different place. After the Great Recession, the Fed gradually raised interest rates nine times, all in quarter-point moves.
The conflict in Ukraine gives officials a reason to be more aggressive just as much as it does to be cautious. Oil prices have soared more than 30 percent since Russia invaded Ukraine, while pump costs soared to a new national record Tuesday, according to AAA. A sustained 10 percent increase over a year in the price of oil translates to a 0.15 percent rise in the year-over-year consumer price index (CPI), according to Luke Tilley, senior vice president and chief economist at Wilmington Trust.
“To the extent that inflation comes in higher or is more persistently high than that, then we would be prepared to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings,” Powell told Congress in March.
The economy isn’t as fragile to swings in oil prices as it was during a similar energy crisis in the 1970s and ‘80s, but higher prices at the pump are all but expected until producers can get more supply on the market. The longer the conflict goes on and the more gasoline prices keep ratcheting higher, the bigger the risk that inflation becomes further entrenched.
“Everything you get off of a store shelf, even the stuff you order online — it’s planes, trains and automobiles to get it there,” McBride says. “There is a filtering-through effect over time, to other goods and probably services, too. … Triple-digit oil prices are a headwind on economic growth, but not a game changer. The things that are a game changer are how broad-based inflation is.”
Consumers and investors could also start to expect that higher inflation will become more permanent — a stark sign for Fed officials, who regard inflation expectations as a self-fulfilling prophecy. Nearly 3 in 4 Americans (or 74 percent) say higher prices are already hurting them financially, according to a March Bankrate survey.
“Recessions do not keep the Fed up at night; it’s just part of the job,” Tilley says. “If they were to see long-term inflation expectations rising in that non-virtuous cycle, that is their nightmare. That is what keeps them up at night.”
3. The Fed will update its economic and rate projections, but they might have a quick expiration date
Starting at the March meeting, the Fed will have to guide investors’ expectations about how many more rate moves they can expect this year. Most of the legwork is bound to happen during officials’ public speeches in between Fed meetings.
Another key part, however, will be with the Fed’s Summary of Economic Projections (SEP) for interest rates, inflation, unemployment and growth, which the Fed is supposed to update at its gathering next week for the first time since December 2021.
In their last projections, officials penciled in at least three rate hikes for 2022. If nine officials rally around a certain number, it would officially shift up the median and send a strong signal that the Fed is unifying around a specific course of action. Experts say they’re bound to show appetite for a few more, even amid the Russia-Ukraine situation.
“They may be inclined at the margin to be a bit more cautious or make nothing but quarter-point increases rather than a half-percentage point increase,” Schlossberg says, who expects five to six increases this year.
The Fed is also likely to increase their inflation forecasts for 2022, reflecting just how much recent price pressures surprised to the upside.
But those projections also might not provide much more clarity at all, given how uncertain the outlook remains. The Fed wants to remain flexible, and those forecasts only show what each Fed official would do, should the economy evolve as it expects.
“Expect to see higher inflation, expect to see more rate hikes in the forecast and expect to see Powell trying to convince everyone they should take all of those with a grain of salt,” Tilley says.
How to prepare for rising interest rates
The Fed has a direct line to your wallet. Every time the Fed’s rate rises, rates are also bound to go up on credit cards, home equity lines of credit (HELOCs), auto loans and adjustable-rate mortgages (ARM). Yields on certificates of deposit (CDs) and savings accounts are also likely to climb.
A rising-rate environment makes having a good handle on your personal finances all the more important.
- Pay down debt: Consumers with higher-rate debt will be hit especially hard by a rate hike, as will borrowers with a variable-rate loan. Concentrate on paying down that debt, especially balances on a credit card. Consider consolidating that debt with a balance transfer card or personal consolidation loan to help you make a bigger dent on your principal balance.
- See if you can lock in a lower deal before the Fed raises rates: Mortgage rates have risen above their pre-pandemic lows, but they’re still historically cheap and have gyrated in recent days amid geopolitical concerns. See if you can lock in a better deal on the market now by refinancing, which could potentially shave hundreds of dollars off of your monthly expenses.
- Shop around for the best place for your cash: Consumers should still save in high inflationary periods, but some accounts are bound to offer a better yield than others. Online banks tend to offer higher yields for your cash than traditional, brick-and-mortar institutions. Look around for the best account on the market that is well-suited to your financial needs.
- Think about how you’d prepare for a recession: Consumers should try to recession-proof their finances, whether that’s by bolstering your income, cutting your expenses or building up your emergency fund. Take advantage of a historically tight job market to negotiate for higher pay and stay connected with others in your network. But remember: While recessions are inevitable, the Fed is raising rates to get control of inflation, which would have more disastrous consequences to your purchasing power and the economy in the long run.
“People talk about the Fed being forced to choose between high inflation and full employment, but at the end of the day, it just seems to make sense to continue to focus on inflation,” Schlossberg says. “COVID certainly gave the Fed leeway to maintain an ultra-accommodative policy stance, and we did expect the Fed to back away from that, but now we’re probably going to see them back away even more.”