- Higher interest rates make borrowing and spending across the economy more difficult, cooling demand
- The Fed is expected to raise rates three more times in 2022
- The next Fed hike will come by July 27
As Americans brave 40-year high inflation, the Federal Reserve is continuing its efforts to rein in prices by jacking up interest rates.
The release of the Consumer Price Index this month revealed that inflation rose 9.1% in June compared with the same time last year, marking the largest increase since November 1981.
The Fed in June raised interest rates by 0.75 of a percentage point to a range of 1.5% to 1.75%, the biggest hike since 1994, USA TODAY reported. More hikes are likely, with the next one expected on Wednesday.
But why are hikes used to combat inflation, and how do they work?
When will the Fed raise interest rates again?
The Fed is expected to announce another hike at the end of its 2-day Federal Open Market Committee meeting Wednesday, at 2 pm ET. The FOMC is the body within the Fed that decides monetary policy, including interest rates. Further hikes are expected at committee meetings scheduled in September, November, and December.
How does a Fed hike work? How does it affect prime rate, 10-year Treasury bond?
As the country’s central bank, the Federal Reserve is in charge of monetary policy. Its dual mandate is to promote “maximum employment and stable prices in the US economy.” Stable prices mean keeping inflation in check, with a long-term mean annual target of 2%.
In 2020, CPI inflation was 1.4%. In 2021, it was 7%.
One of the Fed’s main tools to impact inflation is the federal funds rate, which is the rate banks charge each other for overnight loans.
Although the Fed doesn’t directly control all interest rates, when it raises the federal funds rate, all other interest rates eventually follow suit, including adjustable-rate mortgages, credit cards, home equity lines of credit, and other loans. Some of these are tied to the prime rate, which is based on the federal funds rate, according to Bankrate.com.
A rising federal fund rate also affects the 10-year Treasury bond, which impacts mortgages.
Borrowing money then becomes more expensive for consumers, who in turn spend less. Demand begins to wane and inflation, in theory, starts to relent.
Meanwhile, some Americans, particularly seniors, see their coffers buoyed by higher bank savings rates.
How many times has the Fed raised interest rates in 2022?
The Fed has raised interest rates three times this year. The pandemic’s shutdown of the economy had kept rates near zero before the Fed increased rates by a 0.25 percentage point in March, the first hike in more than three years.
An additional increase of 0.50 percentage point came in May, and then another 0.75 percentage point bump in June, putting the rate at its current range of 1.5% to 1.75%.
How much will the Fed raise rates?
Fed Chair Jerome Powell said at a June press conference that a 0.50 point or 0.75 point increase is “most likely” in July. Some economists think a full percentage point move is possible but unlikely.
Economists surveyed by Bloomberg predicted a 0.75 point hike in July, with subsequent increases, ringing the rate to a range of 3.25% to 3.5% by the end of 2022.
Are interest rate hikes good for stocks?
Interest rate hikes create volatility in the stock market. The value of future earnings tends to dip when higher interest rates are expected, according to US Bank, making investors less eager to bid up stock prices.
Higher interest rates are meant to slow the economy, which can stunt revenues for companies, potentially damaging their growth and stock prices, according to Forbes.
Contributing: Paul Davidson, Medora Lee