By Alice Seeley
Economists warn that another recession may be right around the corner, as the Federal Reserve is expected to begin increasing interest rates this week. This will be the first time that the Federal Reserve has raised interest rates in three years.
The Fed is expected to raise its benchmark federal funds rate by at least a quarter of a percentage point from 0.25% to 0.50%. Federal Reserve Chairman Jerome Powell left open the possibility of a rate increase at every meeting this year and refused to rule out a more aggressive, half-percentage point rate increase.
Earlier this month, Powell stated that the Fed would do whatever is needed to control inflation, even if that means hurting growth. Peter Boockvar, a chief investment officer of Bleakley Advisory Group, supported this decision stating that “until inflation falls sharply, they have no choice but to carry on.” Economists expect at least six rate hikes in 2022, with more to come in 2023.
The rate hike may be delayed until the impact of the war in Ukraine on the U.S. economy is made clear. However, chief U.S. economist at Deutsche Bank, Matthew Luzzetti, said the Russian invasion is forcing the Federal Reserve to “move more aggressively down the road.”
This decision will have a major impact on the average family household budget, according to Greg McBride, Bankrate.com’s chief financial analyst. This increase will mostly affect the average American’s credit card, mortgages, and student loan rates. Credit card rates are currently around 16.34% and are expected to rise when the Federal Reserve increases interest rates. Private student loans, which have variable rates, will increase their interest rates as the Federal Reserve raises rates.
The impact of the Federal Reserve rate cut on mortgages depends on whether the borrower has a fixed or adjustable-rate mortgage. The most common mortgage is a 30-year fixed-rate mortgage, while the Federal rate is for short-term overnight borrowing. Long-term mortgage rates are pegged to yields on government bonds, especially the 10-year Treasury note, according to CNBC.com. When that rate goes up, the popular 30-year fixed-rate mortgage tends to do the same.
The Federal Reserve will release its official policy statement at 2 p.m. EST on Wednesday, and Powell will follow up with a press conference at 2:30 p.m.