The Fed’s Next Rate Hike Could Be Huge. Here's What Consumers Need to Know
- The Federal Reserve is scheduled to meet on June 15.
- At that time, it could implement another large interest rate hike.
- Rate hikes are meant to combat rising inflation.
Borrowing could get even more expensive.
It's a big misconception that the Federal Reserve is in charge of setting consumer interest rates, like the amount borrowers pay on a mortgage or credit card. In reality, the Fed is tasked with establishing the federal funds rate. That's the rate banks charge one another for short-term borrowing purposes.
But still, when the Fed raises rates, it trickles down to consumers. And while the Fed has already hiked up interest rates substantially this year, another big rate hike could be right around the corner.
Consumers should expect big changes
The Fed is scheduled to meet on June 15, and when it does, it's anticipated that interest rates will go up again -- and in a big way. During its last meeting, the Fed implemented a 0.50% interest rate, and it's expected to at least do the same again this week.
In fact, there's talk that the Fed might raise interest rates by 0.75% during its next meeting. That could, in turn, make borrowing a lot more expensive.
Why all of these rate hikes?
Inflation levels have been sky-high over the past year, but most notably in recent months. In fact, in May, the Consumer Price Index, which measures fluctuations in the cost of consumer goods, shot up 8.6% on an annual basis.
The Fed is now raising interest rates in an aggressive way to combat inflation. The reason the cost of goods is up is that consumer demand has been exceeding the supply of available products. But once borrowing becomes more expensive, consumers might start curbing their spending and buying fewer products, thereby allowing supply to catch up to demand. As that happens, the cost of living expenses should ease.
Consumers need to prepare
While it's easy to see why the Fed is moving forward with rate hikes, the reality is that they could end up hurting consumers in different ways. First of all, credit cards, HELOCs, and other products with variable interest rates could become more expensive as a result of the Fed's actions. And it could become more expensive to lock in fixed-rate products like mortgages and personal loans.
In fact, home buyers have been seriously struggling this year due to the fact that mortgage rates are up significantly compared to where they sat in 2021. That's made it even harder for buyers to get a piece of the housing market. Some experts worry that rapidly rising mortgage rates could lead to a housing market crash, though that's unlikely to happen due to a major lack of inventory. But still, it puts prospective buyers in a tough spot.
All told, there's a reason why the Fed is hiking up interest rates so drastically. But that doesn't change the fact that its actions could hurt consumers in the coming months. Those with credit card or HELOC balances may want to look at cutting spending in the near term and paying down what they owe before it becomes even more expensive. And anyone needing a fixed-rate loan should try to lock one in ASAP, before that gets costlier, too.
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