News: Fed Hikes Interest Rates 25 Basis Points. Here’s What It Means
The Fed met and decided to hike its rate by 0.25%. Here’s what that means to you.
Justin Cupler
Contributing Writer at Tally
March 16, 2022
On March 15 and 16, the Federal Reserve met to discuss interest rates and how to slow the fast inflation that’s sending prices sky-high. On March 16, the Fed officially announced it would increase the federal funds rate by 0.25% — a 25 basis point increase.
Let's explore why the Fed opted to raise rates, how it’ll impact you and what impact it’ll have on the economy.
How the higher federal funds rate will affect you
The federal funds rate is the interest rate banks charge each other to borrow or lend money overnight. It also happens to be the base unit the prime rate — the rate banks give to their lowest-risk customers — is calculated upon.
Because the fed rate impacts the prime rate, the ripples are felt across the entire lending industry. If you have a credit card with a variable interest rate or you have a variable-interest loan, you’ll likely see that rate increase slightly at the next adjustment period.
If you are shopping for a home or car after the rate increase, you could see a higher interest rate when you apply for a mortgage, even though your credit has remained the same or improved.
On the flip side, if you have investments with variable interest rates, you could see your interest returns increase slightly due to the higher rates. Also, if you have a high-yield savings account (HYSA) or any interest-bearing bank account, you could see your bank tick the interest yield up a notch.
Why the fed is increasing the interest rate
Falling interest rates helped spur the economy amid the COVID-19 pandemic, sending housing and car sales soaring. It also resulted in higher overall consumer demand. While demand is great, it is too high, leading to a record inflation rate that shot prices upward.
With the economy in good shape, the Federal Reserve will increase the rate to help slow consumer demand and cool inflation.
This is likely not the only hike we’ll see
Don’t get too comfortable with this new federal funds rate. Besides the March 15-16 meeting, the Federal Reserve will meet five more times in 2022. Each of those five meetings could include a rate hike.
May 3-4
June 14-15
July 26-27
September 20-21
November 1-2
December 13-14
How a federal funds rate increase will affect the economy
According to J.P. Morgan, the rising interest rates will cool borrowing, slowing the housing and automotive markets. But it will also spur more saving for Americans because they will earn more interest. This leads to less cash flowing into the economy, slowing economic growth and reducing inflation.
And while investors in variable-interest accounts may see higher returns, those invested in bonds will actually see an inverted reaction to the fed funds rate increase. So, the face value of their bonds will immediately drop the equivalent amount of the rate increase.
As for the stock market, there is no direct relationship between the federal rate and stock returns. However, Wall Street generally doesn’t respond well because borrowing costs increase, which could lower future returns and spur potential stock sales that result in lower stock prices.
No news on the next rate hike
While it's a foregone conclusion we’ll probably see additional rate hikes throughout 2022, we don’t know when they will occur or how much they will be. For now, we can only speculate and wait to see what the Federal Reserve's next move is.