The Sixth Federal Interest Rates Raise: How Would It Affect an Average American?

The US Federal Reserve is set on Wednesday to raise the interest rates once again, making it the sixth time this year that the central bank has pulled off such action. The federal interest rates increase is projected to have a direct impact on the pockets of American consumers, making it further expensive to get a mortgage or pay off credit card debt. 

There are growing calls from US lawmakers, as well as the United Nations, imploring the Fed to stop hiking the federal interest rates. There is concern that the hike might give impetus to a painful recession. But the central bank has not signaled that it will push the pause button any time soon, as it aims to bring down the inflation closer to the 2% target, even at the cost of job losses. 

Currently, the labor market remains strong. Job openings are abundant, and the unemployment rate is remarkably low. However, economists do not expect it last into 2023, especially if the central bank continues to hike the rates aggressively. If today's hike comes in as expected -- 75 basis points -- it would mark the fourth straight increase at that high level. 

The first hike came on March 17 this year at 0.25 percentage points. The second came on May 5, at 0.50 percentage points. The third was announced on June 16 at 0.75 percentage points. The fourth on July 28, at 0.75 percentage points as well. The fifth was put out on September 22 at 0.75 percentage points again. The sixth hike is also expected to be 0.75 percent.   

By boosting the federal interest rates, the central bank aims to curb inflation, which is hovering at a 40-year high. The consumer price index report in September indicated annual inflation has fallen slightly to 8.2% but risen by 0.4% monthly, exceeding the expectations of economists.  

The Reaction of the Stocks 

Due to the speculated interest hike, stocks opened lower. The Dow Jones Industrial Average had fallen 0.4%, while the Nasdaq and S&P 500 were also down by 0.5%.  

Except for one, in all the past five Fed hikes, the S&P 500 had closed at 1% or higher. The most recent hike in late September was the only exception. Leading up to the decision in September, the index was going higher, but it fell immediately following the 75-point hike announcement by Fed. In the final trading hours of the day, the S&P 500 was seesawing between positive and negative territories. How the markets will react following this week's announcement cannot be guessed, despite the clues that the last five rate hikes may provide.  

What Does it Foretell?  

When the Federal Reserve raises the interest rates, it makes it more expensive for banks to lend and/or borrow money from one another. Therefore, the banks impose higher interest rates on their consumers, making it more expensive to get a mortgage, pay off a loan or credit card debt, and more. However, on the flip side, hikes will mean that you earn more interest on the money in your savings account. 

Economists have predicted that the full impact of these federal interest rate increases would take at least one to three years to trickle down through the economy. Nevertheless, the data which is currently piling up suggests that the five increases have already created a new economic normal. 

Above 7 percent, the mortgage rates are the highest in two decades and have added nearly $1,000 per month on the mortgage of a new home valuing $427,000. Similarly, home sales are continuously falling for the past eight consecutive months and are down by 24% from last year. 

The pace of rising Inflation has seemingly dropped, with the consumer price index dipping to 8.2% in September, making it the slowest annual pace since February. Even though that bodes well, but is still well behind the 2% target of the Fed, and the core rate, apart from food and energy components, has continued to increase. 

It cannot be assumed how the sixth interest hike, accumulated with the past five, will impact the American economy. However, economists are not hopeful and say that in the next few years, these moves will hurt the economy badly.