As inflation continues to rise at a historic pace, reaching 8.6 percent in May 2022, the Federal Reserve voted on June 15 to raise interest rates by three-quarters of a percentage point, the largest interest rate hike since 1994.
The Federal Reserve’s decision to raise interest rates by 75 basis points at its June 2022 meeting follows the Fed’s vote to raise interest rates by a half-point in March 2022, an action the Federal Reserve hasn’t taken since 2000.
Additional interest rate hikes are possible at the Fed’s remaining meetings this year in July, September, November, and December.
The Fed indicated at the close of their June 2022 meeting they will likely raise interest rates by another 1.75 percentage points over the remainder of the year, but will ultimately rely on the numbers to make their decision.
Even if the Fed decides not to raise interest rates further, we are currently experiencing one of the fastest interest-rate hiking cycles in the Federal Reserve’s history.
For borrowers with debt, these higher interest rates mean that credit card debt, auto loans, and mortgages are becoming more and more expensive.
How expensive? For every 0.25 percent the interest rate increases, it equates to an extra $25 a year in interest for every $10,000 in debt. This means that if the Federal Reserve were to increase interest rates by 1 percent over four rate hikes this year, consumers will pay $100 extra annually on $10,000 worth of debt.
Fed Raises Interest Rates At Fastest Pace in 30+ Years
As of June 2022, Fed officials projected their target total rate hike for 2022 to be around 3.4 percent, almost double the 1.9 percent the Fed envisioned in March 2022.
Fed rate hikes tend to be passed along to credit cardholders within a month or two, which is why you may have noticed the interest on outstanding credit card balances has begun to increase in June following the Fed’s decision to raise interest rates in March 2022.
What’s concerning for many consumer advocates is that these higher interest rate hikes are coming at a time when Americans are increasingly leaning on credit cards to make ends meet and 2 in 3 Americans is living paycheck to paycheck.
But as inflation continues to increase month after month the Federal Reserve felt the need to raise interest rates higher and faster than originally expected, especially after the S&P 500, the U.S. benchmark stock index dropped 21 percent, on Monday, June 13. Wall Street seemed to agree.
Since that down closure, calls for tougher action from the Fed grew louder as the U.S. economy entered what is known as a bear market.
Bear vs Bull Market
A bear market occurs when a major stock index like the S&P 500 falls 20 percent or more from its most recent peak. So when the S&P 500 closed down 21 percent on June 13, we officially entered a bear market.
A bear market is the opposite of a bull market. In a bull market, the S&P 500 rises 20 percent from recent bear market lows and reaches record benchmark highs.
During a bull market, stock prices are on the rise, unemployment is low, wages are on the rise, and consumer confidence is high, meaning consumers are shopping and buying more than just necessary, basic items. In a bear market, the opposite experience occurs. Stocks are seemingly on sale, consumer confidence is down, and wage increases are almost nonexistent.
Although it sounds counterintuitive that a bull would signal growth and a bear market would signal a decline, one helpful way to try and remember the difference: Bears hibernate and bulls charge.
While watching your 401(k)’s value plummet during a bear market leaves most of us with anxiety-induced stomachaches and insomnia, it’s important to keep in mind that bear markets are a normal feature of the stock market cycle; what goes up, must come down, after all.
Another optimistic note about bear markets? Just because we experience one does not guarantee we will experience an economic recession. Since 1929, there have been 26 bear markets, but only 15 recessions during that time.
Some more good news when it comes to bear markets? They tend to be short-lived in comparison to bull markets. Since 1928, the average bull market has lasted for about 2.7 years, while the average length of a bear market lasts about 9.6 months, according to Hartford Funds.
Although inflation and interest rates are out of your control, there are some things you can do to lessen the financial impact of these higher rates on your personal finances.
3 Ways to Protect Your Finances
The biggest piece of advice? Pay Down High-Interest Credit Card Debt
Prioritize paying down high-interest credit card balances because your debt is only going to increase as the interest rates increase. In other words, the total time it takes to pay off your debt and the total amount you will have to pay is only going to increase.
Especially if you are only able to afford the minimum payments currently on your credit cards, consider working with a consumer credit counseling service like DebtWave, which can negotiate lower interest rates on your behalf, as well as consolidate your multiple payments into one monthly payment.
Other steps you can take to protect your financial health:
1. Bolster Your Earnings with a Side Hustle
If you are struggling to make ends meet, living paycheck to paycheck, consider a part-time side hustle to increase your earnings. A side hustle is a job or occupation that earns you supplemental income. Side hustles are incredibly varied and range in terms of their commitments, cost, and potential income.
Top Side Hustles in 2022 include:
- Tutoring
- Gig Economy (Instacart, UberEats, Door Dash)
- Virtual Assistant
- Sell Arts & Crafts (Etsy, Amazon)
- Pet Sitting / Dog Walker
2. Continue to Fund Emergency Savings
Although high gas prices and grocery bills may make it tempting to move a smaller portion of your paycheck to your savings, it’s important to continue to build an emergency cushion right now. Another bonus with keeping your money in savings right now is that higher interest rates mean that your savings account is earning you more money than it did before.
3. Reduce Expenses
Think about recession-proofing your finances. Along with continuing to build your emergency fund, it’s important to live within your means right now.
While a debt-free journey at first glance sounds like a time to pay off debt, it’s also a time to learn how to live within your means. Taking advantage of financial literacy resources such as a complimentary budget analysis with a certified credit counselor, a complimentary credit session with a credit coach, and free financial literacy programs such as Smart With Your Money LIVE can be instrumental in improving your financial situation long-term.
Plus, when you feel supported on your debt-free journey you may feel more inspired to keep prioritizing your financial health long-term, reducing the likelihood you incur crippling debt in the future.
Looking to pay off high-interest credit card debt?
Schedule an appointment with one of our certified credit counselors here or request help from our team of financial education and credit coach professionals here.