The Federal Reserve raised its target federal funds rate by 0.5 percentage points at the end of its two-day meeting on Wednesday in a continued effort to calm inflation.

While that marks a more typical uptick from large moves of 0.75 percentage points in each of the past four meetings, the central bank is far from done, according to Greg McBride, chief financial analyst at Bankrate. com.

“The coming months will see the Fed raise interest rates at a more typical pace,” McBride said.

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The latest move is just part of a rate-hike cycle, which aims to bring inflation down without tipping the economy into a recession, as some already feared.

“I thought we’d be in the middle of a recession at this point, and we’re not,” said Laura Veldkamp, ​​professor of finance and economics at Columbia University Business School.

“Every time since World War II the Federal Reserve has acted to reduce inflation, unemployment has gone up, and we don’t see it this time, and that’s what stands out,” she said. “I couldn’t really imagine a better scenario.”

Yet the combination of rising rates and inflation has hit household budgets particularly hard.

What the Federal Funds Rate Means to You

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to each other overnight. Whether directly or indirectly, the Fed’s rate hike influences borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.

For now, that leaves many Americans in a bind, as inflation and rising prices prompt more people to rely on credit just as interest rates are rising at the fastest rate since. decades.

With greater economic uncertainty ahead, consumers should take specific steps to stabilize their finances, including paying down debt, especially expensive credit cards and other variable-rate debt, and increasing their savings, McBride advised. .

Pay off high-interest debt

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark, so short-term borrowing rates are already rising.

Credit card annual percentage rates are now above 19%, on average, from 16.3% at the start of the year, according to Bankrate.

The cost of existing credit card debt has already increased by at least $22.9 billion due to Fed rate hikes, and it will increase by another $3.2 billion with this latest increase, according to a recent analysis from WalletHub.

If you have a balance, “take one of the zero-rate or low-rate balance transfer offers,” McBride advised. Cards offering 15, 18 and even 21 months interest-free on transferred balances are still widely available, he said.

“It gives you a tailwind to pay down debt and protects you from the effect of further rate hikes in the future.”

Alternatively, try consolidating and paying off high-interest credit cards with a home equity loan or a low-interest personal loan.

Consumers with variable rate mortgages or home equity lines of credit may also want to switch to a fixed rate.

How to know if we are in a recession

Since longer-term 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the broader economy, these homeowners won’t be immediately affected by a rate hike.

However, the average interest rate for a 30-year fixed rate mortgage is around 6.33% this week, up more than 3 percentage points from 3.11% a year ago. year.

“These relatively high rates, combined with persistently high house prices, mean that buying a home remains a challenge for many,” said Jacob Channel, principal economic analyst at LendingTree.

Rising mortgage rates since the start of 2022 have the same impact on affordability as a 32% increase in house prices, according to McBride’s analysis. “If you had been approved for a $300,000 mortgage at the start of the year, that equates to less than $204,500 today.”

Anyone considering financing a new car will also shell out more in the coming months. Even though car loans are fixed, the payments also increase due to rising interest rates.

The average monthly payment jumped above $700 in November, from $657 earlier in the year, despite the fact that the average amount financed and the average length of loans remain more or less the same, according to data from ‘Edmunds.

“Just as the industry is beginning to see inventory levels improve so buyers can actually find the vehicles they’re looking for, interest rates have risen to the point that more consumers are faced with monthly payments that they’re looking for. ‘they probably can’t afford it,’ said Edmunds Chief Knowledge Officer Ivan Drury.

Federal student loan rates are also fixed, so most borrowers won’t be hit immediately by a rate hike. However, if you have a private loan, those loans can be fixed or have a variable rate tied to Libor, prime, or Treasury bills – meaning when the Fed raises rates, borrowers are likely to pay more interest. , although how much more will vary by reference.

This makes it a particularly good time to identify outstanding loans and see if refinancing makes sense.

Shop for higher savings rates

Although the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate and the savings account rates of some of the larger retail banks, which were close from the bottom for most of the Covid pandemic, are currently at 0.24%, on average.

Thanks in part to reduced overhead, the average online savings account rate is closer to 4%, well above the average rate at a traditional bank.

“The good news is that savers are getting the best returns in 14 years, if they shop around,” McBride said.

The best-performing certificates of deposit, which pay between 4% and 5%, are even better than a high-yield savings account.

And yet, because the rate of inflation is now higher than all of these rates, any money saved loses purchasing power over time.

What’s next for interest rates

Consumers should prepare for even higher interest rates in the coming months.

Even though the Fed has already hiked rates seven times this year, more hikes are on the horizon as the central bank slowly rein ins inflation.

Recent data shows these moves starting to take effect, including a better than expected consumer price report for November. However, inflation remains well above the Fed’s 2% target.

“They will continue to raise interest rates now and into 2023,” McBride said. “The ultimate stopping point is unknown, as is how long fares will remain at this final destination.”

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Correction: A previous version of this story misrepresented the magnitude of previous rate hikes.

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