Fed Hikes Rates 75 Basis Points for Fourth Time — What Does the Historic Move Mean for You?

Mandatory Credit: Photo by Manuel Balce Ceneta/AP/Shutterstock (13414936b)Federal Reserve Board Chairman Jerome Powell speaks during a conversation with leaders from organizations that include nonprofits, small businesses, manufacturing, supply chain management, the hospitality industry, and the housing and education sectors at the Federal Reserve building, in WashingtonFederal Reserve Powell, Washington, United States - 23 Sep 2022.
Manuel Balce Ceneta/AP/Shutterstock / Manuel Balce Ceneta/AP/Shutterstock

As was expected and in a sign that there will be no pivot for the time being, the Federal Reserve unanimously said it will raise interest rates by three-quarters of a percentage point rate. This is the fourth consecutive such hike.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) said in a statement on Nov. 2 that it decided to raise the target range for the federal funds rate to 3.75% to 4% and 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% over time, according to the statement.

Amid a four-decade high inflation and an economy that is showing no signs of cooling down, all eyes were on Chair Jerome Powell’s hints as to which direction the Fed would be taking at its December meeting.

“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures,” according to the statement. “Russia’s war against Ukraine is causing tremendous human and economic hardship. The war and related events are creating additional upward pressure on inflation and are weighing on global economic activity. The Committee is highly attentive to inflation risks.”

Speaking at a press conference, Powell said he was pleased “we have moved as fast as we have” and that he doesn’t think the Fed has “over-tightened.”

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He later added that the U.S. is experiencing an “overheated labor market where demand exceeds supply. We keep looking for signs of a gradual softening, but signs are not obvious. We would love to see vacancies coming down.”

As for whether the country will enter a recession, Powell shared, “No one knows if there’s going to be a recession or not and, if so, how bad that recession will be. The inflation picture has become more challenging.”

Slower Rate Hikes in the Future?

In what could suggest a slower pace of tightening going forward, the Fed added that it would take into account “the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” in determining the pace of future increases in the target range.

For the first time during this rate hike cycle, the Fed has explicitly acknowledged that it will take into consideration both the cumulative effect of its policies and the concept that it operates on a lagged basis, Jeffrey A. Rosenkranz, portfolio manager at Shelton Capital Management, told GOBankingRates.

“While this is well understood by economists and market participants, the new addition to FOMC language is a nod to an eventual pause,” he said.

Rosenkranz added that the pace of future rate increases and the timing of a pivot will still be dependent on incoming economic data over the coming weeks and months. 

“This by no means suggests that the Fed believes their goal of conquering inflation has been met,” he added, “but rather is a concession to the market that they understand the importance of striking a delicate balance between prematurely easing up on financial conditions versus the risk of overcorrecting.”

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Several experts agreed, saying the Fed is relaxing its strict stance against inflation because now it will give previous rate hikes more time to work.

“Monetary policy takes time,” said David Russell, VP of market intelligence at TradeStation Group. “Today’s statement recognizes that with the new phase ‘cumulative tightening.’ They’ve administered the medicine and are more willing to let it work over time. … The new approach lets Powell wait for falling home prices to trickle through to the headline inflation numbers. Everyone expects it to happen, and now the Fed is starting to think the same way.”

However, Powell’s comment in his address clarified the Fed’s perspective: “It’s very premature to think about pausing our rates. We have ways to go.”

How Will This New Hike Affect You?

In terms of how this affects credit card rates, with the average credit card rate currently being 18.77% — the highest since February 1992 — it will soon blow past the all-time record of 19%, set in July 1991, said Ted Rossman, senior industry analyst at Creditcards.com.

“Factoring in today’s 75 basis point hike, if you make minimum payments toward $5,270 at 19.52%, that will keep you in debt for 197 months and cost $7,128 in interest,” Rossman said. “Most credit card holders should see the Fed rate hike passed through to their rate within a statement cycle or two.”

Rossman added that credit card debt always has been expensive, but now it’s even more so.

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“My top tip is to sign up for a 0% balance transfer card,” he said. “Credit card rates are so high that paying down this debt needs to be toward the top of your household’s financial priority list. Every dollar you pay down represents a guaranteed, tax-free return of whatever your interest rate is. Chances are it’s a considerable amount.”

Michele Raneri, vice president of U.S. research and consulting at TransUnion, told GOBankingRates that this fourth consecutive rate hike of that size shows that the Federal Reserve remains committed to raising rates until excess inflation abates.

“From a consumer credit perspective, the most significant impact of these rate hikes on borrowers will continue to be in the mortgage market, and increasingly, during the holiday shopping season, in the credit card industry,” Raneri said. “In the mortgage market, consumers who may otherwise be considering buying a home may choose to continue to hold onto their down payments, waiting to see if interest rates and/or home prices decline in the not-too-distant future.”

Raneri added that, for consumers who do purchase a home, adjustable-rate mortgages may continue to be more popular among consumers seeking lower monthly payments in the short term.

“And consumers looking to tap into available home equity may continue to look towards HELOCs and HELOANs instead of refis,” she added. “Finally, on the credit card front, this latest interest rate hike will most acutely impact those consumers who do not pay off their credit card balances in full through higher minimum monthly payments.”

As we enter the holiday shopping season, Raneri added, it’s essential for consumers to set a budget and stick to it, as the price increases for all ranges of goods over the past year may make it easier for shoppers to overspend.

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“While shopping for gifts, it’s a good idea for consumers to remain diligent when using credit. It’s important to understand that as interest rates rise so can minimum credit card payments,” she said. “Therefore, when making purchases using credit this holiday season, consumers should carefully consider what they will confidently be able to afford to pay off and avoid delinquency.”

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