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US Fed Raises Interest Rates for First Time Since 2018 to Stem Inflation

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The US Federal Reserve announced a quarter-percentage point interest rate increase on Wednesday to stem rising inflation, housing costs. Credit: ING Nederland, via Flickr/CC BY 2.0

The US Federal Reserve announced a quarter-percentage point interest rate increase on Wednesday, nearly two years to the day the central bank slashed its benchmark federal funds rate to zero amid the recession triggered by the COVID-19 pandemic.

“It’s clearly time to raise interest rates,” said US Fed chairman Jerome Powell at a press conference following the conclusion of a two-day meeting at the central bank.

US Fed move to kick off rate hike cycle

The US Fed said it would raise the federal funds rate to a range of 0.25-0.50%, a move that is likely just the kickoff of a lengthier rate hike cycle. The CME FedWatch Tool projects a roughly 35% chance that the benchmark rate will be between 1.75 to 2% by the end of the year.

Looking further ahead, there is less certainty.

The expectation is for more incremental rate increases, with estimates that by the US Fed’s July 2023 meeting, the range will be between 2.25-2.75%, with roughly 50% probability.

Interest rate hike to effect consumer spending

In relative terms, that’s still a low benchmark, but experts say it could still have profound effects on the consumer spending that powers roughly 70% of the American economy.

Credit card borrowers, homebuyers, and small-business owners need to be prepared for the era of cheap money to come to an end.

Credit card holders who hold balances month-to-month will be among the first to notice the effects of tighter monetary policy. “Rate hikes are passed through on existing debt pretty much right away, within a month or two,” said Ted Rossman, a senior credit card industry analyst for, in an interview with NBC News.

Despite the US Fed holding rates near zero for the past two years, the current average credit card annual percentage rate, or APR, is already 2 percentage points away from its April 2019 record high, at just under 18%.

“Market participants seem to be pricing in perhaps seven quarter-percentage-point hikes,” Rossman said. “If that happens, that could take the average credit card rate to (more than) 18 percent.”

The minimum payments don’t change very much with these rate hikes — about a dollar a month per quarter percentage point on the average credit card balance, which sits at just over $5,500, according to the credit bureau Experian — but the policy shift should be a wake-up call for borrowers who are already paying dearly to service their outstanding balances.

“It almost doesn’t matter if it’s 16 or 17 or 18 percent,” Rossman said. “The big point is they’re already high.”

Mortgages impacted by US Fed interest rate hike

Mortgage borrowers will also feel the squeeze.

“Higher mortgage rates will make home buying even more difficult than it already is in the current housing boom,” said Steve Rick, chief economist at CUNA Mutual Group, in a research note. “It will keep more Americans from accumulating wealth through real estate.”

“The housing market is always sensitive to changes in interest rates,” said Lawrence Yun, chief economist at the National Association of Realtors, in an interview with NBC News. For instance, a $300,000 mortgage at a 5% interest rate would cost nearly $350 more per month than if it was borrowed at 3%.

“These are quite sizable changes, especially for the first-time buyers,” Yun said. “Suddenly, they’re squeezed out of the market.”

Mortgage rates, which aren’t as tightly correlated with US Fed activity as credit card APRs, have already been ticking upward, but so far the increases have not been large enough to rein in the ballooning cost of housing. In February, the Consumer Price Index found shelter costs saw their largest annual increase since 1991.

Consumers and small-business owners should view the next few months as a closing window of opportunity to lock in favorable terms and pay down high-interest debt before rates start climbing in earnest, Rossman said. Borrowers with good credit scores and financial discipline might be able to free up more money to pay down their outstanding balances by applying for a credit card with low- or no-interest promotional periods on balance transfers.

If the US Fed does implement seven rate hikes this year, people with debts could find their dollars not stretching as far as they used to. On the average credit card balance, a fed funds rate of 1.75% as opposed to zero would tack an extra four months onto the payoff timeline for a borrower making only minimum payments, with an additional $732 in interest.

“It’s just a good reminder to pay down those balances,” Rossman pointed out.

US inflation rate at 40-year high

The US inflation rate currently sits at 7.9%, which is the highest it has been in 40 years. Increased inflation comes as the prices of gas and goods, which had already been elevated, skyrocketed in response to the war in Ukraine.

The current inflation rate, which is measured by the US Labor Department’s consumer-price index, is at its highest since it reached 8.4% in 1982.

The US is not the only country to face a dramatic rise in inflation in recent months.

Greece’s annual inflation rate soared to 7.2% in February compared to 6.2% in January, accelerating a trend that followed the COVID-19 pandemic and now the Russia-Ukraine conflict, official statistical data released Thursday indicates.

The surge in consumer prices was driven by the price of electricity and fuel, especially gasoline, which has grown astronomically over the past year.

Data shows Greek inflation driving electricity prices higher by an astronomical 71.4% in February, with natural gas leading all other forms of energy with a 78.5% rise. Fuels and lubricants rose by 23.2%, and heating oil rose by 41.5%.

Calamos: 2022 would see volatility in the markets

John P. Calamos, Sr., one of the most prominent financial experts worldwide, said recently that in 2022 there will be a great deal of volatility in the markets, caused by rising inflation and interest rates.

In an exclusive interview with Greek Reporter, the Greek American founder, chairman, and global chief investment officer of Calamos Investments said that as the world is moving beyond the pandemic we are getting back into a more normal economy — and a more normal economy would see higher than zero interest rates.

“Inflation is coming back strongly, the Fed is raising rates, and this causes market volatility. A lot of this is being caused by the fiscal policy pursued by the Federal government,” Calamos noted.


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