The Federal Reserve raised its key interest rate by 0.25% on Wednesday, 7/26/2023, bringing it to a range of 5.25%-5.5%. This is the highest level for the benchmark rate since early 2001, and the 11th hike since the Fed started tightening monetary policy in March 2022.
The Fed’s decision reflects a healthy balance of concern about continued rising inflation and confidence in the strength and resilience of the U.S. economy, which grew at an annual rate of 2.4% in the second quarter, despite the higher cost of borrowing.
The highest point of inflation was in June 2022, when it reached 9.1% (highest since 1981). As of June 2023, the headline inflation rate slowed down to 3.3%, which is still above the Fed’s target of 2%.
The Fed did not commit to raising rates again in September, saying that it will depend on the incoming data and the outlook for economic activity and inflation. Some economists expect that the Fed may pause or even reverse its rate hikes next year, as the effects of fiscal stimulus fade and global growth slows. However, with the recent data showing a healthy balance of concern about continued rising inflation and confidence in the strength and resilience of the U.S. economy, some experts believe that a soft landing is more probable than ever.
What does this mean for you? Well, it depends on your specific situation and goals. However, here are some general implications of the Fed's interest rate hike:
- If you have a variable-rate loan or credit card, you will likely see your interest payments increase. This could put a strain on your budget, so you may want to consider refinancing or paying off some of your debt.
- If you have a fixed-rate mortgage, you will not be directly affected by the Fed's rate hike. However, if you are planning to buy a new home or refinance your existing mortgage, you may face higher borrowing costs.
- If you have extra savings in the bank stashed away for short- and/or mid-term goals, you may benefit from higher interest income from Bank CDs, High Yield Savings, or Fixed Annuities as banks and insurance companies adjust their rates. Keep in mind that inflation is still higher than the Fed’s target, so there is a possibility of earning less than the inflation rate, which erodes your purchasing power over time.
- If you have extra savings stashed away that you’d like to use for your longer-term goals, investing in a diversified stock and bond portfolio is historically one of the best ways to hedge against inflation over time. This does come with short-term volatility, but we don’t let that affect the long-term goals. I am happy to discuss creating a diversified investment portfolio that aligns with your goals, risk tolerance, and time frames.
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Sources:
- Consumer prices up 9.1 percent over the year ended June 2022, largest increase in 40 years : The Economics Daily: U.S. Bureau of Labor Statistics (bls.gov)
- The Advance Estimate of Second Quarter Real GDP | CEA | The White House
- Gross Domestic Product, Second Quarter 2023 (Advance Estimate) | U.S. Bureau of Economic Analysis (BEA)
- CPI Home : U.S. Bureau of Labor Statistics (bls.gov)