Fed Raises Benchmark Interest Rate Again: What It Means To You

ACROSS AMERICA — The Federal Reserve Board continued its drive to tame inflation with aggressive interest rate hikes Wednesday, raising its short-term rate another three-quarters of a percent to a target range of 3 percent to 3.25 percent.

Federal Reserve Chair Jerome Powell said last month the Fed’s strategy would “bring some pain” to the economy, but noted a “failure to restore price stability would mean far greater pain.”

The increase, the third consecutive by the Fed, puts interest rates at the highest point since early 2008. By the end of the year, the benchmark rate could go as high as 4 percent, and an additional quarter of a percent hike could come in early 2023, The Associated Press reported.

The Fed’s action comes after higher-than-expected inflation in August. Inflation was down 2 percentage points from July, but inflation remains painfully high, especially in the volatile food and energy sectors. Consumer prices surged 8.3 percent in August from the same period in 2021.

Raising interest rates is the top tool available to the Fed to slow inflation. Higher rates tend to slow economic growth as Americans rein in their spending and businesses put off expansion, creating less demand and easing the pressure on a tangled supply line.

The risk of the Fed’s strategy is that it could weaken the economy enough to send it into a recession and trigger job losses. Nationally, the unemployment rate rose to 3.7 percent from July to August but was 1.5 percentage points lower than a year ago, according to the Bureau of Labor Statistics.

Unemployment rates in August were higher in 16 states and stable in 34 states than they were a year ago.

The effects of rate hikes are already being felt in the housing market. Previously occupied U.S. home sales slipped 0.4 percent from July to August for the seventh consecutive month as sharply higher interest rates and rising home prices made buying a home less affordable, the National Association of Realtors said in a report Wednesday.

Sales of those homes are down 19.9 percent from August 2021 and have slowed to levels seen in May 2020 near the start of the pandemic.

At the same time, the national median home price increased to $398,500 in August, up 7.7 percent from the same period last year.

The Fed’s action affects the annual percentage rate paid by millions of credit cardholders. Their credit card balances jumped 13 percent in the second quarter from a year earlier, the largest year-over-year increase since 2003, according to Consumer Reports.

The average rate for new credit cards is around 21.4 percent right now. Credit cardholders could see the Fed’s rate increases within a couple of billing cycles, according to Consumer Reports.

Cardholders who pay only the minimum payment or who make late payments can see debt increase quickly. According to the American
Bankers Association, only about 35 percent of borrowers pay off their credit card bills monthly.

Also, Consumer Reports pointed out, credit card issuers don’t have to notify their customers when they raise interest rates.

Overall, WalletHub analyst Jill Gonzalez told Consumer Reports the Fed’s three-quarters of a percent interest hike will cost credit card users an additional $5.3 billion a year, and that’s “on top of the increases that have already happened so far.”

Central banks worldwide are also dealing with inflation. The Bank of Japan began a two-day monetary policy meeting Wednesday, although analysts expect the central bank to stick to its easy monetary policy. Rate decisions from Norway, Switzerland and the Bank of England are next. Sweden surprised economists this week with a full-point hike.

Global tensions remain high as Russia's invasion of Ukraine continues. Russian-controlled regions of eastern and southern Ukraine have announced plans to start voting this week to become part of Russia. The war has killed thousands of people, driven up food prices worldwide and caused energy costs to soar.

Gasoline prices, which helped fuel inflation for months, have been generally falling. But, the average price for a gallon of gas went up for the first time in more than three months, rising to to $3.681 from $3.674, according to motor club AAA.

The Associated Press contributed reporting.