Federal Reserve Rate Hike

December 14, 2022
Money on fire

We may have to raise rates higher to get where we want to go.

Chairman Jerome Powell on the Federal Reserve raising a key borrowing rate to a 15-year high. This will make it more expensive for you to borrow money.

Why It Matters: Not only did the U.S. Central Bank raise borrowing rates to a 15-year high of between 4.25% and 4.5%, but it indicated more rate increases are to come. Bottom Line: Borrowing costs will rise. The Federal Reserve impacts the "federal funds rate" – the overnight lending rate between banks – and this is often used as a barometer for other loans, like car loans or credit cards.

  • The Federal Reserve is attempting to slow inflation through rising borrowing costs, but despite their efforts, high inflation continues to be a challenge for consumers and the broader economy.
  • When inflation is high, your money buys you less or, as Chairman Powell says, inflation "erodes purchasing power." While we expect some inflation (prices generally rise over time), high inflation can hurt consumers and the broader economy because everyday items become more expensive and you need more money, to do/purchase less.
  • Context: Inflation is sitting at the highest levels we've seen in 40 years; we're now seeing the most aggressive rate increases we've seen in 40 years (since the 1980s). The Wall Street Journal explains another reason why this matters: "Economic projections released Wednesday show officials expect their interest-rate increases will slow the economy over the coming year and push up the unemployment rate to 4.6% next year, from 3.7% in November. Historically, an increase of that much in that span has coincided with a recession."

Fed raises interest rates half a point to highest level in 15 years (Watch video here of the Chairman speaking about the economy)

by Jenna Lee,