Rate hikes are here: What does that mean for you?

Mar 16, 2022, 9:36 PM | Updated: Jun 8, 2022, 3:17 pm

(CNN) — The COVID era of free money has come to an end.

After dropping interest rates to zero in March 2020 to revive the economy, the Federal Reserve has just shifted gears to go into inflation-fighting mode.

Fed officials said Wednesday they are raising interest rates, beginning their first cycle of rate hikes since the one that began in late 2015.

The fact that the Fed is finally moving away from zero shows confidence in the health of the jobs market. But the speed with which interest rates could go up underscores concerns about the soaring cost of living.

High inflation — consumer prices rose in February at the fastest pace in 40 years — means the Fed will raise interest rates multiple times in the coming months, central bank officials confirmed on Wednesday.

Americans will experience this policy shift through higher borrowing costs: No longer will it be insanely cheap to take out mortgages or car loans. And cash sitting in bank accounts will finally earn something, albeit not much.

“Money will no longer be free,” said Joe Brusuelas, chief economist at RSM US.

When the pandemic erupted, the Fed made it almost free to borrow in a bid to encourage spending by households and businesses. To further boost the COVID-ravaged economy, the U.S. central bank also printed trillions of dollars through a program known as quantitative easing. And when credit markets froze in March 2020, the Fed rolled out emergency credit facilities to avoid a financial meltdown.

The Fed’s rescue worked. There was no COVID financial crisis. Vaccines and massive spending from Congress paved the way for a rapid recovery. But now the Fed must take on another challenge: rising inflation. Here’s how higher rates will impact consumers.

Borrowing costs are going up

Today, unemployment is very low but inflation is very high. The U.S. economy no longer needs all that help from the Fed.

Every time the Fed raises rates, it becomes more expensive to borrow. That means higher interest costs for mortgages, home equity lines of credit, credit cards, student debt and car loans. Business loans will also get pricier, for businesses large and small.

The most tangible way this is playing out is in mortgages, where expectations of rate hikes have already driven up rates.

The rate for a 30-year fixed rate mortgage averaged 3.85% in the week ending March 10. While that’s still cheap historically, it’s up sharply from under 3% in November.

Higher mortgage rates will make it harder to afford home prices that have skyrocketed during COVID. But weaker demand could cool off prices. The median price for an existing home sold in January soared by 15.4% year-over-year to $350,300.

But it’ll still be relatively cheap to borrow

None of this means it will suddenly become expensive to finance purchases.

Federal Reserve Chairman Jerome Powell said the central bank will likely raise interest rates six more times this year, for a median federal funds rate of 1.9% by the end of the year.

While that’s up from 0.125% today, it’s still low historically.

For context, the Fed raised rates to as high as 2.37% during the peak of the last rate hiking cycle in late 2018. Before the Great Recession of 2007-2009, Fed rates got as high as 5.25%.

And in the 1980s, the Paul Volcker-led Fed jacked interest rates up to unprecedented levels to fight runaway inflation. By the peak in July 1981, the effective fed funds rate topped 22%. (Borrowing costs now won’t be anywhere near those levels and there is little expectation that they will go up that sharply.)

Still, the impact to borrowing costs in coming months will depend chiefly on the speed of the Fed’s rate hikes. There remains much debate about that, although Chairman Jerome Powell said in January he believes there is “quite a bit of room” to raise rates without threatening the jobs market.

Good news for savers

Rock-bottom rates have penalized savers.

Money stashed in savings, certificates of deposit (CD) and money market accounts has earned almost nothing during COVID (and for much of the past 14 years, for that matter). Measured against inflation, savers have lost money.

The good news, however, is that these interest rates will rise as the Fed gets away from zero. Savers will start to earn interest again.

But this takes time to play out. In many cases, especially with traditional accounts at big banks, the impact won’t happen be felt overnight.

And even after several rate hikes, savings rates will still be very low — below inflation and expected returns in the stock market.

Markets will have to adjust

Free money from the Fed has been amazing for the stock market.

Zero percent interest rates depress government bond rates, essentially forcing investors to bet on risky assets like stocks. (Wall Street even has an expression for this: TINA, which stands for “there is no alternative.”)

Higher rates could be a challenge for the stock market, too, which has become accustomed to — if not addicted to — easy money. Markets have already experienced significant volatility amid concerns about the Fed’s plan to fight inflation. Last week, the Nasdaq tumbled into a bear market, signaling a 20% decline from previous highs.

But much will depend on how fast the Fed does raise interest rates — and how the underlying economy and corporate profits perform after they do.

At a minimum, rate hikes mean the stock market will face more competition going forward from boring government bonds.

Cooler inflation?

The goal of the Fed’s interest rate hikes is to get inflation under control, while keeping the jobs market recovery intact.

Consumer prices spiked by 7.9% in February from the year before, the fastest pace since January 1982. Inflation is nowhere near the Fed’s goal of 2% and has gotten worse in recent months.

Economists warn inflation could get even worse in March because commodity prices have spiked since Russia’s invasion of Ukraine. Everything from food and energy to metals have become more expensive, although oil prices have pulled back from their recent highs.

And in recent days, China has suffered its worst COVID-19 outbreak in two years, prompting authorities to lock down key parts of the country. The lockdowns will add further pressure to scrambled supply chains at the heart of inflation.

The high cost of living is causing financial headaches for millions of Americans and contributing significantly to the decade low in consumer sentiment, not to mention President Joe Biden’s low approval ratings.

Yet it will take time for the Fed’s interest rate hikes to start chipping away at inflation. And even then, inflation will still be subject to developments in the war in Ukraine, the supply chain mess and, of course, COVID.

The-CNN-Wire™ & © 2022 Cable News Network, Inc., a WarnerMedia Company. All rights reserved.

KSL 5 TV Live

Local News

a woman puts an arm around a taller man...

Debbie Worthen

Family launches foundation in remembrance of loved one who drowned in Puerto Rico

The BK Outreach effort is named after Ben Kerbs, who died while swimming in Puerto Rico. His family is healing through service.

1 hour ago

A group of young Filipino girls are excited...

Dan Rascon

Tabernacle Choir arrives in Philippines to continue ‘Hope’ world tour

There was celebration, music and dancing as the Tabernacle Choir on Temple Square arrived in the Philippines to kick of the second segment of its Hope world tour.

2 hours ago

The mug shots of Ruby Franke and Jodi Hildebrandt obtained by KSL on Feb. 21 2024. It's expected th...

Shelby Lofton

Long-term therapy expected for Ruby Franke, Jodi Hildebrandt’s young victims

After their mother, Ruby Franke, and previous counselor Jodi Hildebrandt were sentenced for aggravated child abuse, it's expected the Franke children will need long-term therapy to heal from the trauma they've endured.

4 hours ago

The Larry H. Miller Company and Miller family unveiled renderings for the Power District, a nearly ...

Lindsay Aerts

Utah Legislature unveils plan to help finance new MLB stadium

Utah's taxpayer funds are intertwined in a new bill proposed to fund a stadium that will help bring a Major League Baseball team to Utah. State leaders think the investment will pay off.

5 hours ago

Show in Smithfield...

Mike Anderson

‘The groundhog was wrong’: Heavy snow, rain mix hits Cache Valley Utah

Rain across much of the Wasatch Front brought a lot of that heavy, slushy snow to the Cache Valley Wednesday.

5 hours ago

A mother and son were hospitalized Monday night after they were burned near a campfire in West Poin...

Garna Mejia

After boy killed in West Point explosion; fire officials urging education about fire danger

Two fire incidents in less than two weeks involving 12-year-old boys have fire officials urging education about the danger. The 12-year-old in the West Point incident died.

5 hours ago

Sponsored Articles

Modern chandelier hanging from a white slanted ceiling with windows in the backgruond...

Lighting Design

Light Up Your Home With These Top Lighting Trends for 2024

Check out the latest lighting design trends for 2024 and tips on how you can incorporate them into your home.

Technician woman fixing hardware of desktop computer. Close up....

PC Laptops

Tips for Hassle-Free Computer Repairs

Experiencing a glitch in your computer can be frustrating, but with these tips you can have your computer repaired without the stress.

Close up of finger on keyboard button with number 11 logo...

PC Laptops

7 Reasons Why You Should Upgrade Your Laptop to Windows 11

Explore the benefits of upgrading to Windows 11 for a smoother, more secure, and feature-packed computing experience.

Stylish room interior with beautiful Christmas tree and decorative fireplace...

Lighting Design

Create a Festive Home with Our Easy-to-Follow Holiday Prep Guide

Get ready for festive celebrations! Discover expert tips to prepare your home for the holidays, creating a warm and welcoming atmosphere for unforgettable moments.

Battery low message on mobile device screen. Internet and technology concept...

PC Laptops

9 Tips to Get More Power Out of Your Laptop Battery

Get more power out of your laptop battery and help it last longer by implementing some of these tips from our guide.

Users display warnings about the use of artificial intelligence (AI), access to malicious software ...

Les Olson

How to Stay Safe from Cybersecurity Threats

Read our tips for reading for how to respond to rising cybersecurity threats in 2023 and beyond to keep yourself and your company safe.

Rate hikes are here: What does that mean for you?