Go Deeper on the Latest Fed Rate Hike
For more information on what the latest interest rate hike means for your money, here are some of our latest stories on what it all means:
- The Fed Just Hiked Rates Again. Why This Time Is Different and What it Means for Your Wallet
- The Housing Market Will ‘Rebalance’ in 2023, Experts Predict. What That Means for You
- The Latest Fed Move Will Push HELOC Rates Up, But They Might Be Topping Out Soon
- The Best Savings and CD Rates Top 4%. They Could Go Even Higher After Today’s Fed Meeting
- ‘The Worst Is Over’ for Mortgage Rates Despite Another Looming Fed Hike, Experts Say
- The Average HELOC Rate Dropped This Week, But Don’t Call It a Trend
- Stock Market Post-Fed Reaction: Markets Mixed on 0.5% Rate Hike Announcement
Stocks fell sharply after yesterday’s Fed meeting. Here’s what happened — and what that means for your investments in 2023
Investors were optimistic going into the week of the Fed meeting, but after Wednesday’s announcement and press conference, stocks took a sharp turn for the worse.
The main reason for the sudden downturn wasn’t the Fed’s 0.5% rate hike itself — the number was exactly what most investors were anticipating and what the market had already baked into its expectations — but the economic projections and comments from Fed officials that came with it.
In a press conference after the meeting, Jerome Powell reiterated the Fed’s commitment to staying the course and bringing down inflation. “We still have some ways to go,” Powell said. “Reducing inflation is likely to require a sustained period of below-trend growth and some softening of labor market conditions.”
Translation? Investors can expect higher interest rates for longer, and maybe a recession along with it. Right now, the possibility of a so-called “soft landing” — where the Fed raises rates just enough without causing a severe economic downturn — isn’t completely off the table, but it’ll be difficult to pull off.
“[The Fed is] trying to look at all the data points to come up with the absolute best thing for the economy,” says Ashley Sullivan, CFP®, private wealth advisor at LVW Advisors.
Whether the Fed succeeds or not remains to be seen, but no matter what happens, the stock market will likely see its fair share of volatility in 2023. In times like these, the best course of action for the average investor is to keep calm, stay the course, and continue investing in a diversified portfolio for the long term.
What will the Fed do with rates next year?
The Fed offered some projections about what they expect to do with interest rates in the future, but the central bank is notorious for insisting it will make individual rate decisions meeting-by-meeting. The next rate hike would be expected in February, and Chairman Jerome Powell indicated more rate hikes are likely, but they’ll probably be smaller. That will depend on the actual state of the economy and financial conditions, he said.
“Having moved so quickly and having so much restraint that’s still in the pipeline, we think the appropriate thing to do now is to move to a slower pace,” Powell told reporters Wednesday. “That will allow us to feel our way and get to that level and better balance the risks that we face.”
Here’s where you can earn more than 4.00% APY from high-yield savings right now
High-yield savings account rates have increased all year, but it’s only in the past week that they’ve crossed a big milestone: earning more than 4.00% APY.
If you’re considering a new savings account, the interest rate isn’t the only thing to consider. You’ll also want to make sure the account’s fees, minimum balance or deposit requirements, transfer options, and account access make sense for your financial goals. It can help to compare a few different accounts before deciding on one.
But if choosing a top interest rate is one of the primary factors you’re considering, an account with at least 4% interest can help guarantee you’re earning one of the most competitive rates today.
To help you get started, here are all the banks we found earning 4.00% APY or more today:
What experts predict will happen with savings account rates in 2023
Savings account rates grew by a wide margin this year, from under 1.00% APY at the start of 2022 to more than 4.00% APY in some cases today. And they could go up even more after yesterday’s Fed rate hike.
Each time the Federal Reserve pushed the federal funds target rate range higher — it’s gone from 0.25% – 0.50% up to 4.25% – 4.50% since March — many banks increased interest rates for their high-yield savings accounts, too.
In 2023, those rapid rate hikes may become more stagnant. The Fed has signaled that the pace of its rate increases will start to slow, even though more rate hikes are still likely.
For savings accounts, that means that today’s high rates will remain, even if we may soon hit a ceiling.
“I think we’re pretty close to seeing maximum interest rates for short-term savings,” says Kevin Lao, CFP and founder of Imagine Financial Security, a financial planning firm in Jacksonville, Florida. The experts we spoke to largely predict that more savings rates will reach 4% in the new year, and then stay there for a while.
The good news is that even though savings rates won’t jump up, they’re not going down either. From time to time, you may see your savings account rate increase next year if the Fed imposes future rate hikes to push the federal funds target rate range up to 4.50% – 5.00%, says John Boyd, CFP and founder of MDRN Wealth, a financial planning firm in Scottsdale, Arizona.
Rising Fed rates squeeze small business owners and entrepreneurs. The headwinds are stronger for minority-owned companies
When the Federal Reserve raises interest rates, lenders react by hiking the interest rates of certain debt products, such as business loans and credit card APRs. Lenders also become more stringent with their requirements for approving loans.
This isn’t great news for small business owners, who often use financing to get things off the ground. The problem is worse for female and BIPOC-owned business owners, who are more likely to be turned away from funding opportunities.
Minority business owners should know about Community Development Financial Institutions (CDFIs). CDFIs are not-for-profit banks dedicated specifically to funding minority-owned businesses with lower-cost loans and other financial products. A list of CDFIs in the United States is available here.
How a recession could change the housing market, and what it means for homebuyers
In a typical recession, the Federal Reserve will lower its benchmark short-term interest rate to help stimulate the economy, in turn making homeownership an attractive opportunity. But today, the Fed’s primary focus is cooling down inflation by hiking that rate.
“This is not the housing bubble of 2005 to 2008. The biggest difference we see is, collectively, homeowners are sitting on a record amount of home equity. It’s less than it was at the peak of housing prices a few months ago, but the reality is, it’s still higher than it was a year or two ago,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm. “So, even as you see housing prices likely to fall another five to 10% from these levels, there’s still so much equity that you’re not likely to have a big housing disaster.”
A recession does not unilaterally present an opportune time to buy a house. Whether or not it’s a good time to buy primarily depends on your individual financial situation. Signs that you may be in the right position to buy include having flexibility in your budget, an adequate emergency fund, and sustained income security.
Want to know where mortgage rates will go? Look to inflation, not the Fed
Experts say the most recent inflation data will mean more for mortgage rates than yesterday’s 50-basis point increase from the Fed. Even though Chairman Powell, in yesterday’s post-meeting press conference, addressed the significant progress made toward taming inflation, he made it clear the job is far from done.
Additional rate hikes are inevitable but mortgage rates have dropped from record highs over the past month. Experts say there is a lag effect when it comes to what’s happening in real time and how it shows up in inflation data.
“Looking forward, it’s hard to tell when that decline in housing prices shows up in the CPI. That’s what I think the Fed is acknowledging — they know they’re going to get that benefit at some point. It’s just hard to tell when that lag kicks in,” says JR Gondeck, partner and managing director with the Lerner Group, a financial advisory firm.
What yesterday’s Fed rate hike means for HELOCs
Home equity lines of credit are among the consumer products most closely tied to the Fed’s rate hikes. HELOC rates have risen dramatically this year as the central bank quickly ratcheted up its interest rate. Experts say that with the Fed nearing the top of how high it will raise rates, HELOCs might not rise by too much more.
“From where we started the year to where we are now, the customers getting a home equity line now have a little payment risk but not much,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “They should look at that variable rate, add two percentage points to it, and say ‘am I comfortable with it’?”
“Helping to pay for current bills is not a good reason to put that asset at risk,” says Cristy Ward, chief strategy officer at Mortgage Connect, a company that provides services for mortgage and home equity lenders.
As for how long the Fed will keep rates elevated and when it will start to cut them, Powell said reductions might not happen next year.
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,” he said in a post-meeting press conference.
A personal finance expert on the impact of the Fed’s rate hike for consumers
The Fed has changed the math on a range of money decisions big and small. Higher interest rates make debt costlier, borrowing harder, and saving more lucrative. Mortgage rates will likely stay high as long as the Fed’s rate remains high, and the U.S. could be headed toward a recession, if it’s not already in one.
But one personal finance expert says you shouldn’t stress over what you can’t control. Your path to building wealth does not hinge on what the Fed will or won’t do in the future, according to Jeremy Schneider, the founder of the Personal Finance Club.
“An interest rate hike today isn’t really going to change an individual’s life,” Schneider said during a live Instagram with NextAdvisor. “What’s going to change an individual’s life is doing the things that are going to move the needle. Spend less money you are making, invest early and often, and pay down debt.”
What the latest Fed rate hike means for your savings, credit cards, and loans
The Fed’s ongoing interest rate hikes in 2022 have had a ripple effect on the wallets of millions of Americans. Borrowing has become more expensive, interest rates on savings and CD accounts have risen significantly, and the U.S. economy may be slowing down. The Fed has signaled it won’t stop raising interest rates until inflation comes down, so there may be more interest rate hikes in 2023.
The interest rate on your credit cards and loans has likely increased this year and may continue to go up, which means you’re paying more in interest if you’re carrying credit card debt or any other high-interest debt. Prioritize paying it down at this time and avoid taking on more high-interest debt if possible. If you’re planning to use financing to make a large purchase like a house or car, expect to pay more in interest.
Higher interest rates also mean greater earnings on your savings balances and a few more dollars back into your pocket. If you don’t have a high-yield savings account, now’s the time to open one to build your emergency fund.
Fed Chair Jerome Powell confirms the job market will weaken
Americans are going to feel some pain because of the slowing economy. When asked what that pain looks like, Powell said he expects “some softening in labor market conditions.” He said the current labor market remains somewhat tight in part because it’s about 3.5 million smaller than it should be due to a combination of early retirements, people who died during the pandemic, and limited migration.
“I wish there were a completely painless way to restore price stability,” he said in a press conference. “There isn’t. This is the best we can do. I do think, and markets are pretty confident, that we will get inflation under control. I believe we will.”
Will the Fed’s rate hikes send us into a recession?
Ever since the Fed started aggressively hiking rates in March, the big R word has been on everyone’s mind: Recession.
The National Bureau of Economic Research’s official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” An unofficial but popular benchmark is two consecutive quarters of negative gross domestic product (GDP) growth, which the U.S. experienced in the summer of 2022.
In order to tamp down runaway inflation, the Fed needs to slow down the economy. It’s doing so by raising interest rates, which will increase the cost of borrowing for businesses and consumers alike and reduce demand for goods and services. But this comes at a cost: with higher costs for businesses and less demand from consumers, economic activity will likely fall and unemployment will likely rise.
“It’s common for the economy to fall into a recession with aggressive rate hikes,” says Denise Downey, a certified financial planner and founder of Financial Trex, a financial planning firm. “We’ve seen [it] in the past [and] I wouldn’t be surprised if it happens again.”
Fed Chairman Jerome Powell has made it clear that taming inflation is the top priority, even if it means some short-term pain in the economy. “There will be some softening in labor market conditions,” Powell said in a press conference following today’s announcement of a 0.5% rate hike. “I wish there were a completely painless way to restore price stability. There isn’t. This is the best we can do.”
Even though the Fed is expecting higher unemployment next year, whether we enter a true recession is still up in the air. “I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not,” Powell said. “It’s not knowable.”
Whether or not we officially enter a recession, many Americans are already feeling the financial squeeze from rising prices and several high-profile waves of corporate layoffs. Here are some steps you can take to boost your financial security no matter what happens in the macroeconomic environment:
- Make a budget and financial plan
- Build an emergency fund with three to six months’ of living expenses
- Develop your career by learning new skills, networking, and updating your LinkedIn and resume, even if you’re not currently looking for a job
- Increase your income by negotiating a raise, switching jobs, or starting a side hustle
The highest short-term CD rates right now
Short-term CDs are offering over 4% APY right now.
“CDs [with terms from] six months to one year are the sweet spot right now,” says Marty O’Leary, a certified financial planner and founder of Stadium Financial, a financial planning firm in Lake Murray, Florida.
Based on NextAdvisor’s analysis of over 50 banks, the highest six-month CD rate is 4.40% at Merrick Bank. But it’ll cost you: to open a CD with Merrick, you’ll need a $25,000 minimum deposit. If you’re willing to set aside your money for longer, CFG Bank has the highest 12-month CD rate right now, with 4.75% APY. You’ll need a $500 minimum deposit.
Other banks offer competitive interest rates with lower minimum deposit requirements. Before opening a CD, compare different options to find the best rate and term that aligns with your goals. And make sure you have your one-time deposit ready, since you won’t be able to make additional contributions to the account.
Why you may want to consider longer-term CDs in 2023, according to one expert
All year, experts have told us that short-term CDs are best for most consumers. But one expert is beginning to see a shift.
“With us getting closer to the peak of where we’ll see interest rates: Yes. Now’s the time to consider intermediate terms on some of the long-term CDs,” says Kenneth Chavis IV, CFP, a NextUp honoree and senior wealth manager at LourdMurray, a wealth management group.
“Over the next few years, it’s fairly probable some of those rates will start to come down,” says Chavis. While he predicts the next four or five months could bring further rate hikes, “Toward the second half of next year, that’s when we’ll expect rates to be as high as they’re going to be.”
Here’s how he figures it:
If you have extra cash aside from your emergency fund, Chavis says putting half of the savings in a three- or six-month CD could be a smart move going into next year. “When that six-month period is over, I’d look at as long of a term as I can get,” says Chavis.
Here’s how high the Fed expects to raise rates
Along with today’s rate hike, top Fed officials unveiled their projections for economic conditions for the next few years. One thing we’d been waiting to see: What they expect the federal funds rate to be in 2023. This projection sheds some light on how many more rate hikes can be expected next year.
The FOMC’s median projection (it’s a survey of all the members) was 5.1%. With the federal funds rate currently at 4.25% to 4.5%, that means another 50 to 75 basis points on top of what happened today. It’s unlikely the central bank will do that all at once – perhaps a couple of 25-basis-point hikes in February and March.
“What we’re writing down today is our best estimate of what we think that peak rate will be based on what we know,” Fed Chairman Jerome Powell said in a press conference shortly after the announcement. “Obviously if the inflation data come in worse, that could move up. It could move down if inflation data are softer.”
Unemployment may increase more than expected in 2023
Fed officials now expect unemployment to rise even more in 2023 — to 4.6%. That’s up slightly from the Fed’s initial projection that unemployment would rise to 4.4% by next year. A rise in unemployment from 3.7% to 4.6% implies that 1.6 million Americans could lose their jobs, disproportionately affecting Black, Latinx, and less-educated workers. Those groups are typically the first fired and last hired during a recession, and they also face more systemic hurdles in the job market.
“When demand cools and jobs are on the margin, workers in frontline services like manufacturing or construction could really see some real suffering,” Andrew Stettner, deputy director for policy at the U.S. Department of Labor, told NextAdvisor.
Watch Fed Chairman Jerome Powell talk about the latest rate increase
Federal Reserve Chairman Jerome Powell is talking about the Fed’s latest rate hike at a 2:30 p.m. press conference. You can stream his remarks live on the Federal Reserve website, or on the Fed’s YouTube page right now.
Powell’s remarks will start with a statement and explanation of what the Fed’s Federal Open Market Committee (FOMC) is seeing in the economy as it continues its efforts to bring down inflation. Powell will then take questions from journalists, offering viewers more insight into the mind of the country’s top banker.
Powell’s comments following Fed rate increases go a long way toward informing the economic perception and expectation of the country’s investors, economists, journalists, and other experts. In other words, an optimistic tone by Powell could be cause for an afternoon stock market rally. On the other hand, if Powell strikes a more cautionary or foreboding tone, investors might fear the size of future rate hikes, sending stocks the other direction.
How inflation will affect the housing market in 2023
The ultra-hot housing market of the past two years has cooled significantly in recent months. High home prices matched by mortgage rates not seen since before the Great Recession have left the housing market stuck in neutral.
If incoming economic data continues to show inflation cooling, though, experts predict mortgage rates could stabilize, albeit at a higher level than before the pandemic. Cooler inflation will allow supply and demand to reach a more sustainable balance, which will help bring affordability back into the picture for potential homebuyers in 2023.
“The housing market, as a whole, was so hot to begin with that what we’re seeing is a rebalancing. The housing market is basically coming back in line with where it should have been all this time,” says Derrick Nutall, vice president on Citi mortgage’s community lending team.
Breaking news: Fed raises rates by 0.5%
The Federal Reserve just announced that it will be raising the target federal funds rate by 50 basis points (0.5%), bringing the new target range to 425 – 450 basis points.
That marks the seventh consecutive interest rate increase of the year, and brings rates higher than they’ve been since fall 2007. However, today’s increase is slightly lower than the four 75 basis point hikes enacted since June of this year.
A smaller move from the Fed tracks with recent signaling that it may be ready to moderate its rate hikes and hold rates where they are, especially after a series of positive inflation reports starting to show progress in consumer price increases.
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” the Fed said in a press release.
Keep an eye on this page as we bring you the latest coverage and expert analysis to explain what this latest rate hike means for your money — and the steps you should take next.
The best savings and CD rates this week
The current average savings account rate among banks we track is 3.34%. Here’s a look at some of the best high-yield savings account rates right now:
And here are the best CD rates by term this week:
- CFG Bank: 4.60% APY
- Bread Savings: 4.50% APY
- Sallie Mae: 4.50% APY
- Bread Savings: 4.75% APY
- CFG Bank: 4.60% APY
- Sallie Mae: 4.55% APY
Rates aren’t the only thing to consider when it comes to saving, though. If you have a solid interest rate, making regular contributions and saving over time is more important than only chasing yield.
“Once you have your financial plan and you have your goals, you can shut out a lot of the economic noise and work on things that are important for your household,” says Courtney Ranstrom, CFP and partner for Trailhead Planners, a financial planning firm in Portland, Oregon.
If you’re focused on building your emergency fund or planning your retirement strategy, don’t lose sight. CDs and high-yield savings accounts are offering great interest rates that can help you earn a return on the money you set aside for specific goals.
How much can you earn with today’s savings rates?
To put that amount in perspective, say you have $10,000 in savings already, and you’re able to contribute $100 per month toward building your emergency fund. You find a bank that’s compatible with your goals and account requirements you’re looking for, which offers a solid 3.50% APY.
At that rate, your combined starting deposit and contributions could be worth $11,569 in one year’s time.
How the federal funds rate influences savings account APYs
When the Fed raises interest rates, borrowing becomes more expensive for banks, businesses, and consumers alike. But there is a silver lining: when the federal funds rate goes up, so do rates on deposit accounts like savings accounts and CDs.
When you keep money in a savings account, the bank will sometimes pay you interest on the balance. The interest rate is commonly expressed as a percentage known as annual percentage yield, or APY. Banks make a profit based on the difference between the interest they pay on deposits, and the interest they receive on loans.
Traditional savings accounts at brick-and-mortar banks typically pay very little interest, while high-yield savings accounts at online banks can have APYs upwards of 4%. CDs, another popular type of deposit account, may have higher rates but require you to lock up your money for a set amount of time.
As the Fed raises interest rates, banks can charge higher rates on loans. Because of this, many banks also raise their savings account APYs in order to attract more customers to keep their savings at the bank, which then gives the bank more money to lend out.
Here’s a look at the average APY among NextAdvisor’s list of top high-yield savings accounts compared to the federal funds effective rate over the past five months.
Source: NextAdvisor, Board of Governors of the Federal Reserve System
Have mortgage rates peaked?
Better-than-expected inflation numbers in October caused mortgage rates to drop significantly. If good news continues, that could mean the cost of borrowing to buy a home is on its way down, experts say.
“We probably have seen peak mortgage rates unless there is some other major shock to the economy,” Cris deRitis, deputy chief economist at Moody’s Analytics, told us.
High mortgage rates — hitting 7% in October after starting the year around 3.3% for a 30-year fixed rate loan — brought the housing market to a standstill. Combined with high home prices, they’ve made it exceedingly difficult to afford a home. If rates drop and prices come down with them, that could lead to a more active market next year, experts say. But it still probably won’t be anywhere near as hot as it was the past couple of years.
Mortgage rates may not move much following a Fed rate hike
Mortgage rates don’t track the Fed’s benchmark short-term rate increases in the same way as home equity lines of credit (HELOCs) do. However, they have risen dramatically over the past year in response to hot inflation.
When inflation came in cooler than expected — 7.7% year-over-year in October —mortgage rates dropped significantly. While the Fed is expected to continue hiking rates, albeit at a slower pace, well into 2023, experts say mortgage rates may have peaked.
“If inflation continues to decelerate, mortgage rates may get to a point where they stabilize. I will say, they will likely stabilize at a higher level than we’ve been anchored to over the last couple years,” says Odeta Kushi, deputy chief economist at First American Financial Corporation. “That was definitely the exception to the rule.”
Stocks rise slightly ahead of fed Meeting
Investors on Wall Street are cautiously optimistic ahead of this afternoon’s Fed announcement.
The Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 were all up slightly in Wednesday morning trading, continuing their momentum from yesterday after the Bureau of Labor Statistics’ November Consumer Price Index (CPI) report came in better than expected — the second month in a row that inflation is slowing faster than economists predicted.
Price index improvements were partially driven by a drop in gas prices. The US retail gas price, an average of per-gallon prices in America, was $3.35 this week, down from $3.87 a month ago, and down 34% from the high of $5.10 recorded the week of June 10th.
How does the Fed affect the stock market?
When interest rates move, so does the stock market.
The stock market has taken a hammering this year, with the S&P 500 down 16.5% year-to-date, the Nasdaq composite down 29%, and the Dow Jones Industrial Average down 6.6%. Inflation, and the Fed’s efforts to tame it, have played a big part in the downturn.
In general, the Fed lowering interest rates causes stocks to go up, while raising rates makes stocks go down. This is because higher rates mean higher costs of capital for businesses, affecting future profits.
The stock market has seen a lot of volatility around the time of Fed meetings for the past few months. The value of the rate increase itself typically doesn’t come as much of a surprise, since the Fed is fairly good about projecting its plans. But investors still pore over every press release or statement from a Fed official in an effort to predict the Fed’s next moves — and how it could affect the economy — in the weeks or months ahead.
“Based on how dovish [Powell] was when he spoke last, I feel like the market will stay in a trading range [after the meeting],” Linda García, founder of In Luz We Trust, previously told NextAdvisor. “I don’t see it going down if he gives us 50 basis points. We might even see the market react positively.”
Regardless of what the Fed does or how the stock market reacts, remember that experts recommend investing for the long-term. The best way to weather the inevitable ups and downs of the market is to hold a diversified portfolio for the long run and keep dollar cost averaging. History has shown us that the stock market has positive returns over time for those who are able to wait out the dips and troughs.
How the federal funds rate influences home equity rates
Unlike mortgage rates, home equity loan and home equity line of credit (HELOC) interest rates are more closely tied to the federal funds rate. When the Fed raises the federal funds rate, interest rates for home equity loans and HELOCs tend to go up, although the change may not occur immediately after the announcement.
Many lenders have already baked in expectations of rate hikes into their existing home equity loan rates, which are usually fixed. You’re more likely to see immediate increases for variable HELOC rates, which often track an index called the prime rate. (The prime rate is, essentially, the federal funds rate plus 3%.)
If you already have a HELOC open, keep an eye on your interest rate and start planning for any changes to your monthly payment.
And if you’re considering a HELOC or home equity loan, take a close look at your finances to make sure you’re only borrowing what you can afford at a time when debt is getting increasingly expensive. For a HELOC especially, leave some wiggle room in your budget so you can handle any future rate hikes and increases to your monthly payment.
Remember that both HELOCs and home equity loans are secured by your house, so defaulting could potentially cost you your home. Because of this, it’s important to borrow responsibly and have a plan for paying back the loan.
How the federal funds rate influences mortgage rates
The federal funds rate affects how much it costs banks to borrow money, which in turn affects how much banks need to charge consumers to make a profit. While mortgage rates, like any aspect of the financial system, are sensitive to macroeconomic changes — including changes to the federal funds rate — it’s not always a direct cause-and-effect relationship.
“What’s tricky about watching what the Federal Reserve is doing is that it doesn’t always directly translate into a one-to-one change in mortgage rates,” Ali Wolf, chief economist at home construction data firm Zonda previously told NextAdvisor. “There have been times following the Fed’s meeting where mortgage interest rates have actually gone down and times when mortgage rates go up.”
Still, the 2022 spike in mortgage rates can, at least in part, be attributed to the Fed’s string of rate hikes since the beginning of the year.
Here’s a graph tracking the federal funds effective rate and average 30-year fixed mortgage rates from the past year as the Fed has been aggressively raising interest rates:
Keep in mind, while average mortgage rates as a whole are affected by broad economic factors like the Fed’s rate hikes, the individual rate you get is determined by personal factors such as your credit score and loan amount. While you can’t time the market or control what the Fed does, you can get the best rate possible for your individual situation by comparing offers from multiple lenders and making sure your credit is in good shape.
When will the Fed stop raising rates?
While experts have been expecting a smaller rate hike today, we’re still a long ways away from the end of rate hikes. That has to do with how the Fed’s use of its interest rate tool actually works. Higher interest rates don’t have an immediate impact on inflation — they affect consumer borrowing, which affects consumer spending, which should affect prices, eventually.
“It takes a while for those actions to really filter down through the economy, to impact lending, bank lending, impact credit availability. They recognize that when they take these actions, it does take some time,” Christine Cooper, chief economist at CoStar Group, a real estate analytics provider, told us in November.
While the central bank might slow down the pace of its rate increases, it’ll likely be well into next year before it thinks about stopping.
How does the Fed make decisions about rates?
The Fed looks at a lot of economic reports and information to make decisions that best support its dual mandate of maintaining maximum employment and stable prices. Here are some factors the Fed takes into consideration when deciding to raise or lower interest rates:
- Inflation: Inflation is directly related to price stability, so the Fed pays close attention to this metric. The Fed evaluates inflation by looking at several different price indexes, the main one being the personal consumption expenditures (PCE) price index from the Department of Commerce, which tracks the price changes of a wide range of household spending. In addition to the PCE, the Fed also looks at the consumer price index (CPI) and producer price index (PPI) from the Department of Labor. The Fed’s target is to keep inflation at 2% annually, but inflation has been much higher than that for much of 2022, which is what prompted the rate hikes we’ve seen so far.
- Unemployment and the labor market: Aside from inflation, unemployment and the state of the labor market are also important factors the Fed cares about. These include the unemployment rate, labor force participation, nonfarm payroll employment, and more. Taken together, all these metrics paint a picture of the U.S. labor market as a whole, which then helps the Fed determine the state of the economy and the best path forward.
- GDP: Gross domestic product, or GDP, is the market value of all the goods and services produced in a country in a specific time period. This metric helps the Fed judge how quickly or slowly the economy is growing, which in turn informs its monetary policy decisions.
How Americans are coping with the high cost of living
Our friends at CNET published a new Priced Out series this week to highlight the challenge. The series includes features and podcasts that paint a picture of the reality of millions of Americans living paycheck to paycheck and struggling with the rising costs of child care, health care, medicine, elder care, food, and housing. And this matters in the personal finance world. Households that can’t afford essential goods and services are less likely to achieve financial stability, and have less opportunity to save, invest, or plan for retirement.
The CNET team, which like NextAdvisor is owned by Red Ventures, set out to tell the human stories of families who have a hard time paying for basic necessities and services — and who increasingly feel the impact of shrinking paychecks and strained budgets. A team of dedicated writers and editors uncovered how people are coping, coming up with creative solutions, and relying on their communities for help. The CNET series provides the essential tools and resources to navigate a changing economic world, and we encourage you to read and listen!
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Persistent inflation has led many Americans to take up a side hustle
Last month, an additional 165,000 Americans began working multiple jobs, the highest uptick since June, according to the Bureau of Labor Statistics’ latest jobs report.
Side hustles were already trending upward. Two in five Americans reported having a side hustle in 2022, up from one in three the year prior, according to year-over-year surveys commissioned by Zapier, a marketing automation company. The report also found that:
- Nearly 2 in 5 (37%) respondents said they make $5,000 or more from their side hustle annually, with 17% saying they make $15,000 or more.
- Average earnings are $12,689 per year.
- Generation Z, the segment of the population born between 1997 and 2012, spend less time each week on their side hustle than millennials or Generation X (10.5 hours vs. 14.1 hours & 14.9 hours, respectively).
“If you have something with a variable interest rate, like credit card debt with interest rates going up, that’s the first thing I would tackle with your side hustle earnings,” Natalie Bullen, a financial advisor and CEO of consulting company Unapologetic Wealth Management, told NextAdvisor last month. “After that, bulk up your emergency fund — especially with a possible recession coming.”
Still need a side hustle idea? Here are 26 worth considering.
Inflation was better than expected in November
The whole reason the Fed is drawing so much attention right now is because inflation has been higher this year than it’s been in decades. For the second month in a row, however, the most popular gauge of price increases has been better than expected. The Consumer Price Index reported a year-over-year increase of 7.1% in November — better than the 7.3% expected by markets and October’s better-than-expected 7.7%.
“Any month-over-month reading can be a little volatile, but I think there’s a little more confidence now that price pressures are easing,” Angelo Kourkafas, a CFA and investment strategist at Edward Jones, told us.
Two months of improving inflation figures could give the Fed more confidence that its strategy is working, and lead to fewer future rate increases. The optimism generated by the report could also boost financial markets, including effects like lower mortgage rates.
Source: U.S. Bureau of Labor Statistics
We’ve had low interest rates for a long time
The Fed’s 2022 rate hikes have marked the end of several years of very cheap borrowing costs. Mortgage rates in particular had been at or near record lows until the start of the year, and now they’re higher than they’ve been in nearly two decades. Borrowers might have to get used to it, experts say.
“I think it’s going to be a temporary new normal,” Erin Sykes, chief economist at the real estate firm Nest Seekers International, told us last month. “We got ourselves into this mess over a series of years of extremely low rates and people being highly leveraged. It just changed the total mindset of the expectation that people have of getting money for free or close to free.”
What experts are predicting for today’s Fed rate hike
After four consecutive 75-basis point rate hikes, the Fed finally seems to be slowing down. “The time for moderating the pace of rate increases may come as soon as the December meeting,” Fed Chairman Jerome Powell said in a November 30 speech at the Hutchins Center on Fiscal and Monetary Policy.
The CME FedWatch Tool, which analyzes the probability of changes to the Fed rate, is pegging a 79% chance of a 50-basis point hike, and a 21% chance of a 75-basis point hike.
Financial experts agree. “There’s more expectation that the rate hike is going to be 50 basis points rather than 75,” Daly Andersson, co-owner and managing partner at Tenet Wealth Partners, previously told NextAdvisor. “And maybe even expectations that if inflation continues to abate and we see some effects from their policy, that maybe they don’t have to be as stringent with rate hikes throughout 2023.”
Though the rate hikes seem to be slowing down, the Fed has made it clear that they’re far from over. Powell also stated in his November speech that the ultimate level of rates may end up higher than originally expected, suggesting that smaller rate hikes for a longer time are more likely.
“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
A look back at all the Fed rate hikes this year
The Federal Reserve has raised the target federal funds rate six consecutive times in 2022.
In March 2020, the Fed dropped interest rates to zero in response to the COVID-19 pandemic. Rates remained at that level for almost two years, until rising inflation pushed the Fed to raise rates by 25 basis points (0.25%) in March 2022.
Here’s a look at all the rate changes we’ve had this year:
|Date||Rate change||New target federal funds rate|
|Jan. 25-26, 2022||+0 basis points||0 – 25 basis points|
|March 15-16, 2022||+25 basis points||25 – 50 basis points|
|May 3-4, 2022||+50 basis points||75 – 100 basis points|
|June 14-15, 2022||+75 basis points||150 – 175 basis points|
|July 26-27, 2022||+75 basis points||225 – 250 basis points|
|Sept. 20-21, 2022||+75 basis points||300 – 325 basis points|
|Nov. 1-2, 2022||+75 basis points||375 – 400 basis points|
And here’s a look at the federal funds effective rate for the past year:
The federal funds effective rate is the weighted average of the real interest rates at which banks lend to each other overnight. The target federal funds rate the Fed sets directly influences the effective federal funds rate, but the two are slightly different.
What is the federal funds rate?
The federal funds rate is the interest rate for overnight borrowing between banks, and it’s what most people are referring to when speaking about “Fed rate hikes.”
The target federal funds rate affects, but does not directly control, the interest rates you get as a consumer — both on loans like mortgages and credit cards as well as on deposits like savings accounts. Banks take the federal funds rate into consideration when setting the interest rates they offer on consumer lending and deposit products, but ultimately have the freedom to offer whatever rates they want based on their business goals and strategies.
How does the Fed affect the economy?
The Federal Reserve affects the economy primarily by adjusting the target federal funds rate, which is the interest rate for overnight borrowing between banks.
If the economy is overheating or inflation is too high, the Fed will tighten monetary policy by raising the federal funds rate. This makes borrowing money more expensive for banks, which trickles down to businesses and consumers alike. The hope is that with borrowing more expensive, the economy will slow down and inflation will fall.
Conversely, when the economy is sluggish and the Fed wants to give it a boost, the Fed might lower the federal funds rate, known as easing monetary policy.
In March 2020, the Fed dropped the federal funds rate to 0% in response to the recession caused by the COVID-19 pandemic. That decision, among other things, helped encourage an economic recovery in 2021 that also came with high inflation. To correct that, the Fed has been aggressively hiking rates in 2022, in an effort to slow down the economy and bring inflation back to a healthy level.
But it’s a delicate balance to get right, and overdoing it on the rate hikes risks pushing the economy into a recession — which some experts are predicting might happen in 2023.
It’ll be a while before we fully understand the long-term economic impact of the Fed’s latest actions, but many consumers are already feeling the immediate effects on their money. Borrowing is more expensive on everything from houses to credit card debt and the stock market is volatile, but there’s a silver lining — interest rates on deposit accounts are up, meaning your savings account and CDs will earn more in interest.
What is the Federal Reserve and what does it do?
The Federal Reserve, colloquially known as the Fed, is the central bank of the United States. It’s not part of any branch of the federal government, but it exists to serve the American public and is subject to oversight by Congress.
The Fed includes three key entities: the Board of Governors (led by Chairman Jerome Powell), 12 Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The FOMC holds eight meetings every year to review the latest economic data and determine the appropriate monetary policy for the coming months.
At the most basic level, the Fed’s mission is to promote a healthy economy and stable financial system in the U.S. It has two main objectives: promote maximum employment while maintaining stable prices (read: keep inflation at a stable, acceptable rate).