The Federal Reserve had another big meeting this week, with a new rate hike announcement and a dizzying flood of monetary policy jargon that only economists truly understand.
The move brings the central bank’s key interest rate — which influences rates on everything from credit cards to auto loans to mortgages — close to 4%. For context: The Fed hasn’t hiked the federal funds rate this much in a single year since the 1980s, and just eight months ago, it sat near zero. Federal Reserve Chairman Jerome Powell expects more interest rate increases to push down prices in the coming months.
If you’re trying to follow it all, you’re likely to hear and read a lot of economic jargon — terms like “monetary policy,” “tightening,” and “soft landing.” The way the Fed speaks can be vague and difficult to understand, so it’s reasonable if you’re scratching your head wondering what it all means and why it matters.
The Fed’s moves do have an impact on your finances, especially when the economy is in transition like it is now. When the Fed raises the federal funds rate, it becomes more expensive to borrow money, and savings account rates climb. Mortgage rates also usually rise when the Fed raises its benchmark rate, and there’s more volatility in the stock market.
But raising rates is the Fed’s primary tool to slow down consumer demand — or how much people are spending — and rein in inflation. The Fed’s goal is to slow down the economy enough to slow down inflation but not so much to cause a recession, though there’s still a chance the U.S. could tip into one.
“They’re looking at inflation as runaway inflation, so they want to see demand soften,” said Shannon Grey, certified financial planner and founder of InvestEdge Planning, a financial planning firm in San Diego, California. “They want to see that fall and, unfortunately, for the consumer, it’s going to be painful, and not only on the job front but also on how we manage our money.”
Lucky for you, we’re obsessed with these Fed meetings and explaining what it means for your money. Here are five things Powell said during the press conference this week, along with what they actually mean and what you should do about them.
1. “We’re exactly where we were a year ago. So, I would also say it’s premature to discuss pausing [interest rate hikes]. And it’s not something that we’re thinking about…that’s really not a conversation to be had now. We have a ways to go.”
Inflation is still above 8%, despite the Federal Reserve’s attempt to lower it with six interest rate hikes this year. And the Fed wants to see inflation fall back to its target rate of 2% and needs evidence of that via economic data, such as Consumer Price Index reports, before slowing down or pausing interest rate hikes. If inflation continues to rise or maintain, the federal funds rate could rise as high as 5%. However, Powell acknowledged that it would take time for the full effect of the Fed’s decisions to take hold.
What you can do: Inflation is hitting everyone’s budgets, but there are steps to take and actions to avoid that can help you navigate this period of high inflation, for however long it lasts. To help protect your money from inflation, experts recommend going back to the fundamentals of money management:
- Take a hard look at your spending and cut back on discretionary costs (Personal finance expert Tiffany Aliche calls this a “noodle budget.”)
- Focus on saving and building your emergency fund. You’ll want to aim for three to six months’ worth of expenses and put it in a high-yield savings account. (If you’re saving for a goal with a time horizon of one to three years, consider putting those savings away in a Series I savings bond.)
- Keep investing. Now is the best buying opportunity because the stock market is down and everything is cheaper.
- Don’t take on more debt than you can afford. Borrowing money is getting more expensive.
2. “No one knows if there’s going to be a recession or not and, if so, how bad that recession would be. Our job is to restore price stability so that we can have a strong labor market that benefits all over time.”
Powell said he doesn’t know, despite the warnings, if the central bank has or will tip the economy into a recession. In fact, it’s impossible for anyone to know. He also suggests that the Fed is willing to do whatever it takes to curb inflation, even if it possibly damages the economy, which could include driving the unemployment rate up. If the Fed backs off too early, it could make inflation even harder to fight long-term. If the Fed raises interest rates too quickly or by too much, it could spur a recession — not just in the U.S. but worldwide.
What you can do: Recessions are inevitable, but luckily, the same money rules of thumb apply regardless of whether or not we are heading into one. It’s always a good time to set yourself up to be in the strongest financial position possible. Have a budget, pay down debt, spend less than you earn, invest as much as you can, build your emergency fund, and grow your income sources.
3. “We’ve always said it was going to be difficult, but to the extent rates have to go higher and stay higher for longer it becomes harder to see the path. It’s narrowed. I would say the path has narrowed over the course of the last year.”
There’s a chance the U.S. economy can escape a recession as the Fed raises interest rates, which experts call a “soft landing,” but that chance has narrowed over the last year, according to Powell. That’s mainly because prices are still rising well beyond where the Fed wants. Here Powell basically implies the U.S. is more likely to fall into a recession than previously forecasted, or what’s often referred to as a “hard landing.”
What you can do: The economic outlook in the U.S. could get even worse, underscoring the importance of saving for emergencies, paying down debt, adjusting your budget, and most importantly, taking care of your mental health. If money is affecting your mental health, find someone you can talk to about your financial situation. Loved ones can be a great place to start, but you could also speak to a financial therapist or financial advisor if you need more prescriptive advice on managing your money. It’ll be easier to get through a “hard landing” if you’re prepared.
4. “We keep looking for signs … of the beginning of a gradual softening [in the labor market]. Maybe it’s there, but it’s not obvious to me.”
The current labor market conditions give Fed officials little reason to pause rate increases. On Wednesday, Powell spent a lot of time emphasizing that the job market is still strong right now, while simultaneously acknowledging that the Fed’s fight against inflation could weaken it by next year. In September, the Fed predicted the unemployment rate could rise to 4.4% by the end of 2023 and stay there through 2024 — a statistic that implies around 1.2 million people could lose their jobs. Powell has repeatedly said that to get inflation under control, unemployment must go up. Higher unemployment will help slow spending in the short term.
What you can do: Focus on what you can control, like the strength of your professional brand network and your income sources. Even if you’re feeling good about your career, it’s always a good idea to build up your network of professional connections. They may be able to help connect you with other opportunities if the economy gets worse. It could help to get familiar with unemployment benefits in your state, especially if you feel you could be at risk of a layoff at your company. If you need a starting point, these are the best links and phone numbers we could find to file and check on unemployment claims in every state. Consider also branching out and finding additional income streams to add extra cushion to your budget. If you need some inspiration, you could start one of these 20 side hustles today.
5. “The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched.”
Americans have faced persistent steep price hikes for 18 months, and inflation could spread deeper into the U.S. economy, which worries the Fed. One of the Fed’s biggest fears is that inflation will become “entrenched” in the economy, meaning households and businesses will expect prices to keep rising quickly and ultimately to become permanently higher. It’s a psychological effect that can prolong and worsen inflation, so the Fed is trying to avoid it as much as possible. Powell said he doesn’t know whether the economy has already reached that point and reaffirmed the Fed’s strong commitment to stopping runaway inflation.
What you can do: The Fed’s decisions and how the economy reacts to them are out of your control, but you can control your approach to important financial decisions. It starts with a budget. Budgeting can help you stay in command of your income and expenses each month. If you don’t have a budget, begin tracking what you’re bringing in and what you’re spending to help create one. From there, you can tweak your budget to ensure you’re spending less than you earn. You can also automate your budget with a spreadsheet or a budgeting app. And for those who already have a budget in place, now could be the time to reassess. What made sense during the COVID-19 pandemic or even before may no longer apply.