Fed Raises Interest Rates to 16-Year Record-High

On May 3, 2023, The Federal Reserve raised interest rates for the tenth straight time since March 2022, increasing interest rates by 25 percentage points. Now the federal interest rate ranges between 5 and 5.25 percent, which is the highest interest rate since August 2007.

Interest rates have steadily increased as the Federal Reserve attempts to lower inflation to its goal of 2 percent. Inflation has dropped from a peak of 9.1 percent in June 2022 to 5 percent in March 2023 but is still higher than the Fed’s 2 percent target rate.

The Fed’s rate increases since March 2022 mean that interest rates have increased by 5 percent, and consumers are now paying record-high rates to borrow money. Mortgage rates have more than doubled, the costs of auto loans have increased dramatically, as has credit card borrowing and business loans, and the risk of a recession has also increased.

“Credit card rates are above 20 percent, rates on home equity lines of credit have doubled, and any recent mortgage debt or auto loans have come at a high price, too,” Greg McBride, chief financial analyst at Bankrate.com, told NBC News.

In a statement announcing the hike, the Federal Reserve omitted language included in previous statements that signaled more interest rate hikes are likely. Federal Reserve Chairman Jerome Powell acknowledged that the Fed had not yet decided if there would be a pause on future interest rate increases but noted the change in the statement language around future policy was “meaningful.”

“My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation,” Powell said in a press conference following the Fed’s announcement. “Since early last year, we have raised interest rates by a total of 5 percentage points in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Powell reiterated that price stability is the responsibility of the Federal Reserve and that “Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”

If no more rate hikes are ahead, the question then becomes how long the Federal Reserve will keep borrowing costs at punishingly high levels before deciding to lower them.

Investors are optimistic that interest rate cuts will come shortly after the economy shows signs of weakening. However, others note that Powell will likely take his time to lower interest rates so that he doesn’t repeat what happened in the 1980s. During that time, then-Fed Chair Paul Volcker cut rates during a downturn only to see a resurgence of inflation.

“We on the committee have a view that inflation is going to come down not so quickly,” Powell said. “It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates.”

In other words, although this could be the last rate hike for a while, interest rates may remain elevated for the foreseeable future. 

But then again, not everyone agrees the Fed is done raising interest rates this year, with some even anticipating interest rates will rise in June at the Federal Reserve’s next meeting.

If inflation were to accelerate, the Fed “won’t hesitate to resume hiking interest rates because they’re determined to break inflation’s back,” said Ryan Sweet, chief economist at Oxford Economics. “As such, there is a risk that the pause is temporary.”

Seema Shah, the chief global strategist at Principal Asset Management, agrees with Sweet.  In an emailed statement to NBC News, Shah said that with inflation still above the target rate of 2 percent and the broad economic picture still looking “fairly robust,” the Fed would be more likely than not to keep additional rate hikes on the table.

“Provided the economic data slows only gently and inflation remains elevated, and the banking sector volatility is fairly contained, we think a June hike is still possible,” she wrote. “Indeed, we believe there is a higher risk of a rate hike in June than what the market is currently pricing in.”

How the Latest Fed Interest Rate Hike Affects Credit Card Debt

Since most credit cards have a variable interest rate, there’s a direct connection between the Fed’s decision to raise interest rates and the interest rate you are charged on your credit card. As the federal funds rate rises, the prime rate does, as well, and your credit card rate often reflects these increased rates within one or two billing cycles. In other words, credit card debt just got more expensive.

Credit card annual percentage rates are now averaging more than 20 percent, which is an all-time high. With interest rates on the rise, more cardholders are also carrying debt from month to month as less of their payment is going toward the principal and more money is used toward the interest.

“People are racking up debt and borrowing at high rates and that’s troublesome,” said Tomas Philipson, University of Chicago economist and a former chair of the White House Council of Economic Advisers.

With this latest rate increase, consumers with credit card debt will spend an additional $1.7 billion on interest, according to an analysis by WalletHub. Factoring in the hikes between March 2022 and March 2023, credit card users will wind up paying at least $31.7 billion in extra interest charges over the next 12 months, WalletHub found.

In addition to the cost of borrowing increasing, another side effect of increased interest rates is that it’s likely to become harder to borrow money. The Federal Reserve expects credit to tighten, making it harder to get loans, especially if you have less-than-perfect credit.

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While the cost of borrowing money is more expensive than ever, the increased interest rates are also giving consumers an opportunity to boost their savings accounts, although McBride warns that these attractive savings opportunities may be nearing an end. 

“CD yields on maturities of one year and longer have peaked and now is the time to lock in,” he said. “A slowing economy coupled with the Fed moving to the sidelines mean CD yields will start pulling back soon.”

With more economic uncertainty ahead, consumers should be taking aggressive steps to secure their finances — including paying down high-interest debt and boosting savings, McBride said.

If higher interest rates have you struggling to pay down high-interest credit cards, consider a complimentary one-on-one financial analysis with one of DebtWave Credit Counseling’s certified credit counselors, or start your journey to financial freedom online.

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