Fed Raises Interest Rates by 0.25%

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What happened

On March 22, the Federal Reserve raised its benchmark interest rate by 0.25%. It's the second 0.25% rate hike to come from the Fed this year as the central bank works to bring inflation levels down.

So what

Inflation has been surging since the latter part of 2021, and it's been putting a huge strain on consumers. In February, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods and services, rose 6% on an annual basis. But the Fed has long stood firm in its belief that 2% annual inflation is the optimal level for a healthy economy. As such, the central bank is continuing to raise interest rates until CPI readings get closer to that mark.

Of course, the decision to raise rates wasn't an easy one this time around given the recent banking industry meltdown. But ultimately, the Fed felt it needed to move forward with another rate hike to make progress on the inflation front.

"The Fed's in a bit of a bind," former New York Fed President Bill Dudley told CNN. "On the one hand, they should keep tightening because inflation is still too high and the labor market is too tight. On the other hand, they want to make sure they don't do anything to exacerbate the stress on the banking system," he said. "There's not really a right solution."

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Now what

The Fed's most recent rate hike represents its ninth straight increase, and the decision to raise rates by 0.25% should not come as a huge surprise. But still, consumers are apt to feel the strain of rate hikes.

The Fed doesn't set consumer borrowing rates directly. Those are determined by individual lenders. Rather, the Fed controls the federal funds rate, which is what banks charge each for short-term borrowing.

But an increase in the federal funds rate commonly leads to costlier borrowing costs across the board, from auto loans to home equity loans to personal loans. Consumers with variable interest debt, such as those carrying credit card or HELOC balances, are likely to also see their costs rise. And given that the Fed isn't done fighting inflation, consumers who don't need to borrow in 2023 may want to err on the side of waiting.

Now the one silver lining in all of this is that Fed rate hikes tend to lead to more generous interest rates across banking products like savings accounts and certificates of deposit (CDs). So consumers with spare cash can benefit from today's higher interest rate environment. It's those who need to borrow money or are already in debt who need to be extra cautious.

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