Inflation has been top of mind for many Americans this year.
Despite the Federal Reserve’s attempts to lower runaway inflation over the past several months by increasing interest rates, the latest reports show inflation rates are still very high for a number of everyday expenses, including food, shelter, medical care, utilities, and more.
As we near the Fed’s next decision on interest rates — and another expected rate hike — one expert is predicting “we have a long ride” still to go. Kimberly Howard, certified financial planner and founder of KJH Financial Services, a financial planning firm with locations in Massachusetts and Colorado, expects the Fed will continue rate hikes not only this year, but through fall of 2023. Then we may see rates slowly decrease, Howard says.
Given the Fed’s commitment to raising rates until inflation recovers, that could mean a long time before prices even out.
“I think we have a lot of pain ahead,” she says.
Interest Rates on the Rise
Since March, the Federal Reserve has raised its target range for the federal funds rate four times, in an effort to bring inflation back down to its goal of 2%.
But it’s not an overnight process, and even raising rates by a total 2% so far this year hasn’t done much to curb inflation. The latest Consumer Price Index shows inflation still up by over 8% year-over-year.
“It’s supply and demand. There’s not enough supply for all of the demand,” says Howard. “People see that everywhere. You go to the grocery store, and everything’s so much more expensive to buy. Anything and everything has increased in prices.”
Interest rates must move higher, experts say, before those prices can stabilize.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Federal Reserve Chair Jerome Powell said in a speech last month. “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance.”
When the Fed gets its next opportunity to raise interest rates later this week, experts like Howard expect another large rate hike. “I think they’re definitely going to go for 75 basis points again, at a minimum,” says Howard. “There’s a chance that they could even go to 1%.”
A full percent jump would increase the federal funds rate to a target range of 3.25%-3.50%. Interest rates have not been that high since Jan. 2008, after rate hikes in response to the housing crisis the year before.
How to Prepare for Higher Interest
Howard predicts that rising interest rates could continue through the end of next year — before officials are able to bring down prices.
Everything from mortgage interest rates to grocery store runs grow more expensive with stubborn inflation and rising rates. But there is at least one silver lining for those who are able to maintain or build an emergency fund: savings account interest rates are on the rise, too. That means the amount you can earn on your savings is rising, with the best savings account rates now reaching 2% APY or more.
It’s best to put your money in a bank account that gives you liquidity, says Howard. High-yield savings accounts offer a solid return on your savings, but also ensure if you need the money for emergencies. “You may not be getting a lot in a [high-yield] savings account, or you may not be earning a lot in a checking account, but at least it’s safe and it’s going to stay stable for a short-term.”