An interest rate hike can impact your existing debts, as well as any new ones you take on. That’s because the federal funds rate is the basis for rates on consumer credit like mortgages, car loans and credit cards. When the Fed raises its target rate to combat inflation, lenders and creditors follow suit by raising their own rates on consumer borrowing.
It may seem counterintuitive for a central bank to raise rates in the face of rising prices, but that’s exactly what the Fed did in the 1980s when inflation soared to its highest levels ever. It was a double-barrel monetary blast that helped bring prices down, but the effect was also a harsh one on consumers who saw their loan and credit card rates skyrocket.
Similarly, the Fed is currently using its most powerful weapon to try to douse the hottest inflation in over 40 years, and it looks like this is just the start of several more large-scale rate hikes. In fact, the Fed’s “dot plot” suggests that interest rates will be at 3.5% by December and close to 4% next year before falling again.
That’s why it’s important for you to understand how the Fed works and its impact on your money. We asked three experts to explain what’s going on behind the scenes, why it’s taking so long for rates to rise and what it could mean for you in the coming months.