Federal Reserve boosts interest rates — again. Here’s what it means for your wallet.

Federal Reserve boosts interest rates — again. Here’s what it means for your wallet.

With inflation still high, though cooling, the Federal Reserve is again turning to its most effective weapon in its battle against soaring prices: Another rate hike. 

The central bank on Wednesday boosted its benchmark interest rate by 0.5 percentage point, marking its seventh consecutive hike this year. There are some signs that its campaign against the hottest inflation in four decades is paying off, with the consumer price index last month easing to its slowest rate of inflation since December 2021.

Yet despite the gradual slowing in the CPI, inflation remains historically high, with prices rising 7.1% last month from a year ago. In order to tame runaway prices, the Fed is boosting the cost of borrowing, which in theory should dissuade consumers and businesses from making purchases — and that slowdown in demand, should in turn put the brakes on inflation. 

But by boosting the cost of borrowing, that effort has made it more costly for consumers to take out loans and carry a balance on their credit cards.

“The cost of borrowing is a whole lot more expensive than it was just a year ago,” said Matt Schulz, chief credit analyst at LendingTree. “The best thing is for people to assume when they are making their budgets and estimating what their expenses will be is to assume that prices are gong to continue to rise, and interest rates will also continue to rise.”

Economists expect that the Fed will continue to boost rates in 2023, although rate hikes are expected to get smaller as inflation eases. 

Federal Reserve raises interest rates for seventh time this year


Read on to learn how the next Fed rate hike could affect your money.

What is the Fed’s new rate?

The central bank on Wednesday boosted its benchmark rate by 0.5 percentage point, bringing the Fed’s target range to between 4.25% and 4.5%. That marks a step-down from a string of bigger rate hikes this summer, when the bank made four consecutive 0.75 percentage point hikes.

But investors and economists will be listening for hints from Fed Chair Jerome Powell on Wednesday about the potential pace of rate hikes next year, as well as the policymakers’ stance on the pace of inflation. Another topic of concern is whether the Fed sees an economic slowdown or recession ahead.

“[T]he cumulative increase to date ranks amongst the most aggressive increases since the 1980s,” noted Lawrence Gillum, fixed income strategist for LPL Financial, in a research note.

Impact on borrowers

Each 0.25 percentage-point increase in the federal funds rate translates into an extra $25 a year in interest on $10,000 in debt. 

Prior to Wednesday’s rate hike, the Fed had already boosted rates six times this year, for a total increase of 3.75 percentage points since the beginning of the year, or an additional $375 in interest for each $10,000 in debt.  

Factoring in this week’s 0.5 percentage point hike, Americans will now pay an additional $425 in interest for every $10,000 they have in debt.

Impact on credit cards

The Fed’s to further ratchet up its short-term interest rate means higher APRs on your credit cards, Schulz said.

Consumers “will see their credit card’s APR rise by that 50 basis point amount within the next billing cycle or two,” he predicted. Already, the average APR on a new credit card offer is higher than 22%, Schulz noted. 

That won’t impact people who pay off their cards every month, but Americans who keep a balance could be facing hefty interest charges. One of the best methods for coping with a balance is to get a zero-percent balance-transfer card, which allows you to transfer your balance from one card that charges interest to another that charges 0% for an introductory period. 

Many of these cards are still available, Schulz said. Another option is to call your credit card companies and request a lower rate, which issuers are often willing to grant, he added. 

Impact on mortgage rates

Earlier this year, mortgage rates soared in tandem with the Fed’s series of rate hikes, edging over 7% for a traditional 30-year loan — more than double the rate from January.

But mortgage rates have been trending downward in recent weeks. That’s due to lenders anticipating fewer Fed rate hikes in the coming months, according to D. Brian Blank, assistant professor of finance at Mississippi State University, in The Conversation.

30-year fixed mortgage rate climbs back to two-decade high


Mortgage rates could continue to slide lower, especially given November’s better-than-expected inflation report, noted Jacob Channel, senior economist at LendingTree, in an email. 

“We could end the year with rates at about 6% — or potentially even lower — if inflation figures are very encouraging,” he said. “With that said, there are no guarantees regarding where rates will end up.”

Impact on savings accounts and CDs

If there’s an upside to higher interest rates, it’s that it means better returns for savers. 

“Although deposit account rates have lagged the federal funds rate increases, deposit rates are reaching highs not seen in more than a decade,” said Ken Tumin of DepositAccounts.com, in an email. “Further deposit rate increases are likely as the Fed continues to hike rates.”

Online banks are offering the best rates, with the average online savings account now yielding 3.02%, he added. Meanwhile, the average online 1-year CD yield now stands at 4.15%.

Still, with inflation still trending above 7%, that means savers are still losing money by putting their funds in accounts bearing 3% or 4%.

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