(TargetLiberty.org) – The negative effects of inflation continue to rage across the United States in early 2022, prompting uncertainty and confusion about the future. Consumers are already feeling the sting from increases in the cost of housing, groceries, and other necessities. Now, the Federal Reserve says it may be about to implement an interest rate hike in response.
Expect an Increase
Federal Reserve Chair Jerome Powell provided an update on the upcoming rate hike during a press conference that took place shortly after the Federal Open Market Committee(FOMC)’s monetary policy meeting ended on January 26. The chairman said rates will hold firm for the moment, but Americans should expect to see an increase by no later than March.
The Federal Reserve is eyeing a three-quarter-point increase in the interest rate, at least for the moment. It also intends to slow asset purchases, which typically inject a quick influx of cash into the economy during times of hardship, as per a schedule first proposed by the Fed back in December.
What’s Driving the Shift?
Powell’s comments during the press conference reveal exactly why the Federal Reserve wants to increase the interest rate this coming spring. The rapid expansion of economic activity across the US and healing labor market apparently leave households and businesses in a much better financial position than they were in circa 2020.
The theory, here, is both the economy itself and the American people are now in a better position to cope with an interest rate hike, which would slow inflation. Furthermore, unrestricted inflation carries far higher risks than the suggested three-percentage-point increase itself.
In effect, the Fed probably feels it’s the lesser of two evils.
Still, Powell was careful to temper his glowing outlook with a healthy dose of reality during the press conference. He acknowledged the fact consumer and COVID-sensitive sectors continue to struggle from the pandemic hardships, but drew attention to evidence suggesting the Omicron variant is far less contagious than previous iterations. If the current wave passes quickly, it could facilitate a rapid return to strong growth.
Start Preparing Now
While the interest rate remains near-zero for the moment, consumers should begin prepping for the inevitable increase now to ward off its most serious effects.
Bankrate’s Chief Financial Analyst Greg McBride told reporters at CNBC the coming rate hike is unlikely to be an isolated incident. While increases are uncommon, they typically occur in succession. “The last time the Fed raised rates, it raised rates nine times in a three-year period,” he explained.
McBride feels the rate increase will primarily affect the cost of borrowing and saving money. While consumers may see a tiny improvement in returns from savings accounts, they’ll also pay more to take out loans — including mortgages — or carry a balance on a credit card.
A single rate hike isn’t likely to make enough of a difference to cause a crisis. Cumulative hikes over a short period of time, however, could start to impact household budgets and the overall economy. Consumers might also face fewer opportunities for financing as banks tighten up qualification thresholds in response.
So, what can you do to protect yourself? A good credit score may help; now is a great time to work on paying off debt. But you should also be proactive about finding better financial solutions, too. Ask your bank how to access lower rates, or transfer credit card debts to a zero-interest balance transfer card. Pay off what you can and consolidate the rest for the lowest possible rate you can get.
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