Fed rate hike: Key interest rate raised 0.75 points to fight inflation

The Federal Reserve raised its key short-term rate by 0.75%.

It's the biggest hike in 28 years as the Fed tries to tamp down inflation by raising borrowing costs.

The central bank signaled more rate hikes may be coming in 2022.

WASHINGTON – The Federal Reserve rolled out the heavy artillery in its bid to fight a historic inflation spike that has shown little letup.

The aggressive strategy is likely to further slow the economy and increases the risk of recession. It has triggered a brutal market sell-off.

The Fed raised its key short-term interest rates by three-quarters of a percentage point Wednesday – its largest hike since 1994 – to a range of 1.5% to 1.75%. It downgraded its economic forecast.

More big moves may come. Fed officials forecast the federal funds rate will end 2022 at a range of 3.25% to 3.5% and next year at close to 4%, according to their median estimate.

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Will the Fed keep raising interest rates in 2022?

That suggests officials tentatively plan aggressive increases in July and September before throttling back to more typical quarter-point increases the rest of the year.

"I do not expect moves of this size to be common," Fed Chair Jerome Powell said of Wednesday's hike.

That sent stocks higher, with the S&P 500, which fell into a bear market earlier this week, closing up 54 points or 1.5%.

At a news conference, Powell said the Fed will probably choose between a half-point and three-quarters of a point hike at its meeting in July.

"We thought that strong action was warranted at this meeting, and today we delivered it," Powell said. "We aren't going to declare victory until we really see convincing evidence, compelling evidence that inflation is coming down."

To put the Fed’s turnabout in perspective, the key rate began 2022 near zero, and its half-point increase in March was the largest since 2000. At that time, officials predicted the rate would rise to about 1.9% by December.

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What does a rate hike do?

The Fed’s hike Wednesday and its new projections are likely to ripple through the economy, sharply pushing up rates for credit cards, home equity lines of credit and mortgages, among other loans. Fixed, 30-year mortgages have climbed to 5.23% from 3.22% early this year on the expectation of Fed moves.

Americans, particularly seniors, should reap the benefits of higher bank savings rates after years of piddling returns.

The Fed lifts rates to curb borrowing, cool off an overheated economy and fend off inflation spikes. It lowers them to spur borrowing, economic activity and job growth.

Inflation shows little letup

Fed officials ratcheted up their rate hike plans amid signs that inflation appears more entrenched than they thought, according to reports by Barclays and The Wall Street Journal.

In early May, Powell suggested that half-point rate increases were likely at meetings in June and July. Policymakers had no plans for a three-quarters point move, a view that lifted financial markets at the time.

After starting to ease in April, the consumer price index surged 8.6% annually in May, a 40-year high. Equally worrisome, the University of Michigan’s measure of consumer inflation expectations, which can affect actual price increases, jumped last month.

"We take that very seriously," Powell said. "It was quite eye-catching."

Barclays said the bump up in inflation expectations “raises the risk that a self-reinforcing inflationary cycle could take shape.”

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A three-quarters-point move sends “a resounding signal of the Fed’s resolve to guide inflation back to its 2% target,” Barclays said.

The Fed expects its preferred yearly inflation measure, which is different from the CPI, to drop from 6.3% in April to 5.2% by the end of the year, up from its March estimate of 4.3%. It predicts a core reading that strips out volatile food and energy items will be 4.3% at year-end, above its prior 4.1% projection.

Slowing the economy on purpose

The sharply higher interest rates are likely to further slow an economy that has been moderating. The Fed said Wednesday it expects the economy to grow 1.7% in both 2022 and 2023, down from its March estimate of 2.8% and 2.2%, respectively, according to officials’ median forecast.

It predicts the unemployment rate, just above a 50-year low at 3.6%, will rise to 3.7% by the end of the year and 4.1% by the end of 2024. It had projected a decline to 3.5% this year.

Economic output increased 5.7% last year, the most since 1984, on a reopening economy, increasing COVID-19 vaccinations and massive federal aid to households.

The Fed’s bolder rate-hike strategy is an acknowledgment it’s more willing to tolerate rising unemployment and the risk of recession to corral inflation, Barclays said. Last month, Powell and other Fed officials said the job market was so vibrant they probably could steer the economy to a “soft landing” of moderately slowing growth that kept unemployment stable while taming inflation.

Powell said Wednesday he still believes such a scenario is possible, but "the pathway for us to get there – it's not getting easier."

Though the labor market is robust, adding about 400,000 jobs a month in recent months, the economy has begun pulling back because of soaring inflation and rising interest rates. A measure of business investment rose less than expected in April. The Commerce Department said Wednesday that retail sales fell 0.3% in May. Higher mortgage rates are cooling the housing market.

Powell said, "(Consumer) demand overall is still very hot in the economy," and the Fed aims to use higher rates to rein in inflation.

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Normally, the Fed nudges up rates to contain inflation in a strong economy. It runs the risk that a big rate increase will topple a slowing economy into recession by next year.

Powell acknowledged the Fed's projected federal funds rate of close to 4% would be "moderately restrictive," meaning it would hurt economic growth. He said he thinks 4.1% unemployment -- the Fed's estimate for late 2024 -- is historically low and there's room to bring inflation back to the Fed's 2% target without tipping the economy into recession.

Is the Fed raising rates too fast?

Some economists said the Fed is going too far. Inflation is likely to slow as supply chain troubles ease and more Americans return to the workforce, relieving worker shortages and rapid wage growth.

“Our objection to this more aggressive (Fed) action is that it is unnecessary because the forces which have driven the recent inflation numbers are already fading,” Ian Shepherdson, chief economist of Capital Economics, wrote in a note to clients.

The Fed was forced into its hard-nosed strategy because it underestimated inflation’s staying power through most of last year. Officials said skyrocketing prices would retreat quickly as supply problems were resolved and consumer purchases sparked by the recovery from the COVID-19 downturn returned to normal. Russia’s war on Ukraine and the delta variant of the coronavirus, in part, disrupted that scenario.

Fed officials were more intent on supporting the recovering economy and ensuring Americans came back to a favorable job market than on curbing inflation.

"Clearly, the FOMC was late to the game in responding to elevated inflation, and just as clearly, they seem intent on making up for lost time," Richard Moody, chief economist of Regions Financial, wrote to clients.

The central bank also said Wednesday it started shedding trillions of dollars in Treasury bonds and mortgage-backed securities it has amassed to lower long-term rates.

Rather than sell the bonds outright, which could disrupt markets, the Fed plans to gradually trim its holdings by not reinvesting the proceeds from some of the assets as they mature.

Contributing: Elisabeth Buchwald

Fed raises key interest rate in attempt to curb inflation

The Federal Reserve raised its key short-term interest rate by a half percentage point Wednesday, its largest hike since 2000, and signaled further big moves may lie ahead as officials scramble to curtail a historic spike in inflation.

"There is a broad consensus (among Fed policymakers) that additional (half-point) rate increases should be on the table at the next couple of meetings," Fed Chair Jerome Powell said at a news conference.

Top economists expect the Fed to lift the rate to a range of 2.25% to 2.5% by the end of the year.

But Powell said Fed officials have no plans to boost rates by three-quarters of a point at any meeting, declaring it's "not something (the Fed's policymaking committee) is actively considering." Economists had speculated such a scenario was possible.

Stocks rallied after Powell's comment. The Dow Jones Industrial Average closed 933 points higher, or 2.8%, making it the largest one-day gain since November 2020. The S&P closed up 3% while the tech-heavy Nasdaq Composite grew by 3.2%.

The central bank also said it will begin shrinking its $9 trillion in bond holdings next month, a strategy that will nudge long-term interest rates higher.

Wednesday’s hike, which was widely expected, boosts the Fed’s benchmark rate from a range of 0.25% to 0.5% to a range of 0.75% to 1%.

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It’s expected to set off a domino effect through the economy, pushing up rates for credit cards, home equity lines of credit and adjustable-rate mortgages, among other loans. At the same time, Americans, particularly seniors, should start to benefit from higher bank savings rates after years of negligible returns.

While Powell said officials are not considering a three-quarter point hike at any given meeting, he made clear the Fed won't hesitate to lift rates sharply through the year to tame inflation. He said policymakers plan to move "expeditiously" to return the Fed's key rate to the 2.25% to 2.5% range considered "neutral" because it theoretically would neither juice nor dampen economic growth. Economists believe the Fed will reach that level by year's end.

But if the Fed needs to hike further, achieving a "restrictive" rate that would crimp growth in order to bring down inflation, "We will not hesitate to go that level," Powell said.

In a statement after a two-day meeting, the Fed acknowledged the economy contracted early in the year but said it's still fundamentally strong.

"Job gains have been robust in recent months, and the unemployment rate has declined substantially," the Fed said.

And it underscored its vigilance about rising prices.

Besides Russia's war in Ukraine, the Fed noted that "COVID-related lockdowns in China are likely to exacerbate supply chain disruptions. The Committee is highly attentive to inflation risks."

The Fed hikes rates to curb borrowing, cool off an overheated economy and fend off inflation spikes. It lowers them to spur borrowing, economic activity and job growth.

Early in the pandemic, amid unprecedented business closures and layoffs, the Fed slashed its federal funds rate to zero and launched massive bond purchases to lower long-term rates.

Now, however, the Fed is combatting sky-high inflation even as growth is slowing from last year’s robust 5.7% pace. That marked a 37-year high as vaccinations increased and the economy reopened.

The unusual dynamic is stoking worries that rapid Fed rate hikes could tip the economy into recession.

Powell, however, noted that demand in the economy is so far outpacing supply that the Fed should be able to scale back demand without triggering a recession. He noted there are a record 1.9 job openings for every unemployed American.

"There should be room to reduce the surplus demand without putting people out of work," he said. "It's a strong economy. Nothing about it says it's close to ... recession."

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Did the Fed take inflation too lightly?

The Fed has consistently underestimated inflation’s staying power, forcing policymakers to repeatedly ramp up their rate hike plans. As recently as early November, Fed officials were calling inflation a “transitory” byproduct of an economy recovering from the COVID-19-induced recession and related supply chain bottlenecks.

By December, they acknowledged price increases were more persistent than they thought and forecast three rate increases in 2022, up from one in their September outlook. That would bring the rate to about 0.9% by year’s end.

In March, with inflation heating up further amid the Russia-Ukraine war, the Fed lifted its key rate – by a quarter-point from near zero – for the first time in more than three years. It also revised upward its year-end rate estimate to 1.9%.

Now, the Fed is revamping its playbook again, with economists predicting a federal funds rate of about 2.4% by December and warning a higher rate is possible.

Behind the aggressive approach is annual inflation that reached a new 40-year high of 8.6% in March. Economists blame the supply snarls, pandemic-related worker shortages that have boosted wages and strong consumer demand heightened by federal stimulus money.

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Total employee compensation surged by a 32-year high of 1.4% in the first quarter, the Labor Department said, intensifying fears of a wage-price spiral that could be difficult to control.

"We can't run that risk," Powell said.

And hiring has been stronger than anticipated. Employers added an average of 562,000 jobs a month from January to March as more than 2 million Americans streamed back into a favorable labor market with record job openings. The unemployment rate is at 3.6%, just above the 50-year low it reached before the pandemic.

That has stirred fears of further wage and price increases and bolstered the Fed’s belief that the economy is healthy enough to withstand large rate hikes.

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Has inflation peaked?

The government said last week the economy unexpectedly contracted by 1.4% in the first quarter. But the poor showing was traced to weaker inventory building and a widening trade deficit, both of which are volatile. Consumer and business spending – the core of the economy -- notched solid gains.

At the same time, many economists believe inflation has peaked, with supply snags starting to ease and a growing labor force easing wage pressures. That could lessen the need for the Fed to continue to lift rates dramatically later this year.

Powell, though, said the Fed won't ease off rate increases until it's confident "inflation is under control and starting to come down."

The central bank on Wednesday also said it will begin shedding the trillions of dollars in Treasury bonds and mortgage-backed securities it has amassed. The purchases ballooned the Fed's balance sheet to about $9 trillion.

Rather than sell the bonds outright, which could disrupt markets, the Fed plans to gradually trim its holdings by not reinvesting the proceeds from some of the assets as they mature.

The Fed said it would reduce the Treasury bonds in June by up to $30 billion and the mortgage securities by up to $17.5 billion, ramping up those levels to $60 billion and $35 billion, respectively, within three months. Fed officials also have discussed the possibility of selling the assets to diminish its balance sheet more quickly if necessary.

The shrinking holdings should nudge mortgage and other long-term rates higher over the next few years.

Contributing: Elisabeth Buchwald

Fed raises interest rates for first time in 3 years to fight inflation ...

The COVID-19-induced era of rock-bottom interest rates is over – just as the U.S. finally seems to be turning the corner on the pandemic.

Yet while falling COVID-19 cases and solid consumer demand are helping clear the way for higher rates, the Federal Reserve is taking aim at the pandemic’s stubborn economic legacy: soaring inflation.

Moving to curtail a historic surge in consumer prices, the Fed raised its key short-term interest rate Wednesday – by a quarter-percentage point – for the first time in more than three years and forecast six more hikes this year. That’s up from the three total quarter-point increases Fed officials predicted in December and more than the six moves many top economists predicted this week. The Fed forecast another four hikes in 2023.

The central bank also sharply boosted its inflation forecast, largely as a result of Russia's attack on Ukraine, while lowering its estimate of economic growth, highlighting the quandary the Fed faces as it tries to tame price increases without tipping the economy into recession.

“The invasion of Ukraine by Russia is causing tremendous human and economic hardship,” the Fed said in a statement after a two-day meeting. “The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”

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During a video new conference, Fed Chair Jerome Powell said officials believe the economy can handle multiple rate hikes without slipping into recession.

"It's clearly time to raise interest rates," Powell said. "We do feel the economy is very strong and well positioned to withstand" higher rates.

What do Fed rate hikes mean?

Traditionally, the Fed increases rates to curb borrowing, temper an overheated economy and fend off inflation spikes. It lowers them to spur borrowing, economic activity and job growth. Now, it potentially faces a worst-of-all-worlds scenario of spiraling inflation and slowing growth.

Wednesday’s hike bumps up the federal funds rate – which is what banks charge each other for overnight loans – from near zero to a range of 0.25% to 0.5%. It’s expected to ripple through the economy, pushing up rates for credit cards, home equity lines of credit and adjustable-rate mortgages, among other loans. But Americans, especially seniors, should start to get some relief from puny rates for savings accounts and CDs.

How did rate hike affect stock market?

Immediately following the Fed's decision stocks fell – but eventually reversed course.

After trading higher leading up to the decision, the Dow Jones industrial briefly turned negative but closed 1.6%, or 519 points, higher Wednesday. The S&P 500 and Nasdaq composite nearly wiped away their gains from earlier in the day. But the S&P 500 closed up 95 points, or 2.2%. And the Nasdaq rose 489 points, or 3.8%.

The yield on the 10-year Treasury rose above 2.2% after the announcement. That's the highest level 10-year bond yields have been in three years. Hours later, yields fell to around 2.19%.

St. Louis Fed bank chief James Bullard dissented from the decision, saying he preferred to raise the rate by a half-point. In its statement, the central bank added that it anticipates "ongoing increases...will be appropriate."

Although Powell told Congress last month that he supported a quarter-point increase at the March meeting, economists have debated how aggressive the Fed will be in the months ahead amid a worrisome economic backdrop.

"We have plans to raise interest rates steadily," he told reporters Wednesday, noting the Fed's forecast for six more hikes imply it will act at each remaining meeting this year. If the central bank needs to move more quickly, "then we'll do so," he added, suggesting a half point hike is possible at some meetings.

Is the Fed raising rates further in 2022 and beyond?

The Fed now expects its benchmark rate to rise to 1.9% by year-end – above its pre-pandemic level – and 2.8% by the end of 2023, higher than many top economists projected.

Since fall, Fed policymakers have been gearing up to combat a bout of inflation that has steadily hit new 40-year highs, with the consumer price index (CPI) rising 7.9% annually in February.

Russia’s invasion of Ukraine last month compounded the problem by further juicing fast-rising gasoline and food prices – Russia is among the world’s top oil producers – and worsening global supply-chain bottlenecks. The average price of regular gasoline hit $4.32 a gallon Tuesday, up from $3.50 just a month ago, according to AAA.

Worker shortages spawned by the pandemic are also stoking inflation by forcing employers to bid up wages to attract a smaller pool of job candidates. That, in turn, is prompting companies to raise prices to maintain profit margins.

Yet the leap in prices is also dampening consumer spending, and the Ukraine war is battering the stock market and global growth – all of which is set to slow the U.S. economy.

How is the current U.S. economy?

The Fed on Wednesday said it expects the U.S. economy to grow 2.8% in 2022, down from its December estimate of 4%, according to officials’ median projections. That’s still sturdy growth by historical standards but analysts worry an intensifying war and sharp rate increases could slow the economy further or even nudge it into recession.

The Fed estimates its preferred annual inflation measure (which is different than the CPI) will end the year at 4.3% -- well above its 2% target -- before easing to 2.7% in 2023, up from its prior forecasts of 2.6% and 2.3%, respectively. It predicts a core measure that strips out volatile food and energy items will be 4.1% at year-end and 2.7% at the close of 2023, up from prior estimates of 2.7% and 2.3%.

Fed officials still expect unemployment, now 3.8%, to drop to its pre-pandemic mark of 3.5% – a 50-year low – by the end of this year and to remain at that level by the close of 2023. That suggests the Fed doesn't expect inflation or rising rates to derail the economy or job market.

What is inflation rate for 2022?

Inflation is expected to moderate this year as the pandemic eases and more truck drivers, along with factory, warehouse and port employees, return to work, helping alleviate the supply troubles. But the increase in the consumer price index is now expected to peak in late spring at 8.7%, higher than previously believed and it will take longer for inflation to subside, predicts economist Kathy Bostjancic of Oxford Economics.

Although Powell said the Fed believes it can boost rates to lower inflation while maintaining a strong labor market, he made it clear that reining in inflation is the priority.

"The plan is to restore price stability," he said, noting it's necessary for low unemployment in the long run. "Price stability is an essential goal."

In an opinion piece in Tuesday’s Washington Post, Larry Summers, Treasury secretary under President Obama, said the Fed took inflation too lightly over the past year and “will have to head in a dramatically different direction” to “avoid stagflation (high inflation and stalled growth) and the associated loss of public confidence in our country now.”

What other moves did the Fed make?

The Fed on Wednesday also said it it will begin reducing its trillions of dollars in Treasury bonds and mortgage-backed securities "at a coming meeting" after launching the bond-buying at the start of the pandemic to lower long-term rates. The purchases ballooned the Fed's balance sheet to about $8.8 trillion.

Rather than sell the bonds outright, which could disrupt markets, the Fed plans to gradually trim its holdings by not reinvesting the proceeds from some of the assets as they mature. The shrinking balance sheet will also nudge mortgage and other long-term rates higher.

Wednesday’s moves mark a reversal for a central bank that had been focused on helping the nation heal from the recession and 22 million job losses caused by the pandemic. In March 2020, as the COVID-19 crisis upended the economy, the Fed slashed its benchmark rate to near zero and launched the bond buying.

As recently as early November, Powell said officials believed the inflation surge was transitory and would ease as both the supply snags and pent-up consumer demand from a reopening economy pulled back.

He said the Fed would be patient and hold off on raising rates so the economy could reach full employment – an environment in which virtually anyone who wants a job has one.

But by late November, Powell acknowledged the supply problems and inflation would linger longer than expected. The U.S. is still 2.1 million jobs short of its pre-pandemic level and the share of people over 16 working or looking for jobs is at 62.3%, below the 63.4% pre-crisis mark. But many Americans retired early during the pandemic and most are not expected to return, and Powell has said he believes the economy is at full employment.

Contributing: Elisabeth Buchwald

Dow rallies after Fed ups rates a half point, downplays recession risk

Damian J. Troise

Associated Press

NEW YORK — Stocks rallied and bond yields fell on Wall Street Wednesday after Federal Reserve Chair Jerome Powell downplayed the likelihood of an even larger rate increase than the one just announced on Wednesday.

The remarks, which came after the Fed announced its decision to raise its key interest rate by double the usual amount, allayed concerns the Fed was on its way to a massive increase of three-quarters of a percentage point at its June meeting.

The S&P 500 climbed 2.2% as of 3:10 p.m. Eastern. The Dow Jones Industrial Average was up 662 points, or 2%, to 33,791, and Nasdaq up 2%, reversing losses.

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Most aggressive hike since 2000

Bond yields fell after the Fed’s announcement. The yield on the 2-year Treasury dropped to 2.65% from 2.78% late Tuesday, an unusually large move. The yield on the 10-year Treasury fell to 2.94% from 2.96% It had initially jumped to 3.01% until Powell’s remarks during a press conference.

The comments came shortly after the Fed said it raised its benchmark short-term interest rate by a half-percentage point, its most aggressive move since 2000, and signaled further large rate hikes ahead. The increase raised the Fed’s key rate to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.

The Fed also announced details of how it will start reducing its huge holdings of Treasury debt and mortgage-backed securities, a tool the central bank has used to help keep long-term interest rates low.

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The latest move by the Fed had been widely expected, with markets steadying this week ahead of the policy update, but Wall Street was concerned the Fed might elect to raise rates by three-quarters of a percentage point in the months ahead.

Powell eased those concerns, saying the central bank is “not actively considering” such an increase.

More rate hikes won't lead to recession, Powell says

Earlier, Powell also said the economy can make it through rate increases without falling into a recession.

“The economy is strong and well positioned to handle tighter monetary policy,” he said, though he cautioned “it’s not going to be easy.”

Investors are worrying about whether the Fed can pull off the delicate dance to slow the economy enough to halt high inflation but not so much as to cause a downturn. Still, the market cheered the Fed's latest moves.

“It’s certainly heady days when the market doesn’t blink at the most aggressive rate hike in 22 years, but keep in mind this was extremely well-telegraphed and priced in,” said Mike Loewengart, managing director, investment strategy at E-TRADE from Morgan Stanley.

The central bank also announced that it will start reducing its huge $9 trillion balance sheet, which consists mainly of Treasury and mortgage bonds, starting June 1.

Rising energy prices still stoking inflation worries

Energy stocks were among the biggest gainers Wednesday following a 5.3% increase in the price of U.S. crude oil after Europe took a step closer to placing an embargo on Russian oil as that country continues its war against Ukraine. Any embargo could strain oil supplies and push prices still higher. Exxon Mobil rose 2.8%.

The Fed’s aggressive shift to raise interest rates comes as rising inflation puts more pressure on businesses and consumers. Higher costs for energy and other commodities have prompted many businesses to raise prices and issue cautious forecasts to their investors. Wall Street and economists are worried that higher prices on everything from food to gas and clothing will prompt a slowdown in consumer spending and crimp economic growth.

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The worries have worsened with Russia’s invasion of Ukraine and its impact on energy and key food commodity prices. China’s increasingly stricter lockdown measures because of rising COVID-19 cases have also added concerns about slower economic growth because of supply problems and shipping backlogs.

Wall Street is closely watching economic data for any signs that inflation might be easing. Consumer prices surged in March, but a measure of inflation that excludes food and energy had its smallest monthly rise since September. That was a welcome sign for investors and more of the same in the coming months cold temper inflation concerns.

“If we can get just a few more readings showing inflation slowing, that could be the match that sparks some confidence,” said Ryan Detrick, chief market strategist for LPL Financial.

Corporate earnings mixed

Tupperware slumped 34.2% after the direct seller of plastic storage containers and cosmetics withdrew its financial forecast for the year following a highly disappointing first quarter. The company cited pressure from inflation, lockdowns in China and the conflict in Ukraine.

Lyft plunged 31.2% after the ride-hailing company gave investors a disappointing revenue forecast for its current quarter.

Airbnb rose 5.4% after the short-stay home rentals company sharply narrowed its first-quarter loss and gave investors an encouraging revenue forecast. Starbucks jumped 10.3% after reporting surprisingly strong sales at stores that have been open at least a year, which is a key measure of health for retailers.

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Interest rate increase: How Fed hike will affect your wallet, finances

The hike would be first increase of the federal funds rate in more than 3 years and will kick off a projected 5 to 7 such moves this year.

Americans will soon see higher rates on everything from credit cards to mortgages.

But they will also finally see rates rise on some bank savings accounts and CDs.

Consumer borrowing costs are headed higher.

Much higher.

The Federal Reserve raised its key short-term interest rate by a quarter percentage point Wednesday, and Americans will soon see higher rates on everything from credit cards to mortgages.

The good news: Consumers will finally see rates rise from measly levels on at least some bank savings accounts and CDs.

Fed rate hike 2022: How interest rates will affect mortgages, loans

The Fed raised its key short-term rate from near zero by a quarter percentage point in March.

On Wednesday, the central bank is set to push it up another half point, its largest bump in 22 years.

The move will drive rates higher on everything from credit cards to mortgages.

Just six weeks ago, Americans were facing sharply higher borrowing costs as the Federal Reserve launched an aggressive campaign of interest rate hikes to curb soaring inflation.

Now the Fed is putting those rate increases on steroids, and consumers will have to dig even deeper into their wallets to pay off loans.

What a Fed rate hike means for you (get ready to pay more)

Paul Davidson and David Carrig

USA TODAY

The Federal Reserve decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.

Consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit are the most likely to be affected by a rate hike, says Greg McBride, chief analyst at Bankrate.com. He says it’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016.

“These interest rate hikes could add up to hundreds of dollars per month in extra fees for credit card, adjustable-rate mortgage and HELOC borrowers,” McBride says.

The Fed’s likely decision to lift the federal funds rate, which is what banks charge each other for overnight loans, will have several effects on consumers. Here's how it may impact mortgage rates, auto loans, credit cards and bank savings rates:

Mortgages

The Fed’s key short-term rate affects mortgages and other long-term rates only indirectly.

Thirty-year fixed mortgage rates hit a 2017 high last week as the average jumped to 4.21% in anticipation of the Fed’s move Wednesday and another similar hike. That is up from a year ago when the average 30-year mortgage rate was 3.68%, according to Freddie Mac.

“For consumers currently shopping for a mortgage to purchase a property or refinance an existing loan,” says NerdWallet mortgage analyst Tim Manni, a Fed rate hike "shouldn’t feel like a real shock to the system since the rate move has already been 'baked' into the market.”

A third hike later this year could boost the rate by as much as another quarter-point or so, increasing the monthly mortgage payment on a $200,000 home by up to $30.

More on mortgage rates:

Fed rate hike: What it means for mortgage rates

Adjustable-rate mortgages, by contrast, typically are modified annually.

“Borrowers with adjustable rate mortgages that are seeing their rates reset should brace for higher payments. Because most ARMs only adjust once per year, the next rate reset could be a doozy if it encompasses 2 or 3 Fed hikes in the interim,” McBride says.

Adjustable rates, he says, could rise about three-quarters of a percentage point in that period, increasing the monthly payment of the $200,000 mortgage by $84.

Other factors may loom large in addition to future Fed rate hikes that will determine the direction of mortgage rates moving forward. If Congress fails to approve President Trump’s fiscal stimulus, for example, long-term rates could fall regardless of the Fed, while a faster-growing economy and higher inflation could drive up borrowing costs faster.

Auto loans

Typical five-year auto loans will be more directly influenced by a quarter-point increase in the Fed’s key short-term rate, with a 4.25% car loan rate rising by a similar quarter-point, or $3 a month, McBride says.

An increase Wednesday’ and two similar interest rate increases this year would increase the monthly payment for a new $25,000 car by a total of $9.

“Nobody will be downsizing from the SUV to the compact based on rising interest rates,” he says.

How rate hikes can affect your investments:

How to position your portfolio for rate hikes

Fed rate hike: 7 questions (and answers)

Credit cards and home equity lines of credit

Revolving loans with variable rates, such as credit cards and home equity lines of credit, will become more expensive since they feel the most immediate impact from an increase in the Fed’s key short-term rate.

Average credit card rates are about 16.26%, while home equity lines are about 5.21%, according to Bankrate.com.

Banks should pass along quarter-point increases in the federal funds rate to those consumer rates within weeks.

More on rates and credit cards:

4 things credit card holders can do to get ready for a rate hike

Bank savings rates

Since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on customer deposits. Don’t expect a fast or an equivalent rise in your savings accounts or CD rate though.

“Still not a whole lot of improvement for savers to count on the third time around,” McBride says.

Low interest rates have spelled narrow profit margins for banks for years. They have an opportunity to benefit from a bigger margin between what they pay in interest and what they earn from loans.

“But your odds – and your rate of return – go up dramatically if you are seeking out the top-yielding offers from banks that are willing to pay more in order to bring in deposits. They’re also the most likely to raise rates in an effort to remain competitive,” McBride says.

NerdWallet credit and banking analyst Sean McQuay advises you should search for a higher-yield savings account.

“Saving in a high-yield versus low-yield account would earn Americans $5.6 billion more per year in savings account interest,” McQuay says. A high-yield savings account pays about $275 more per year than a low-interest account on savings of $25,000, according to NerdWallet.

More on banks and savings rates:

Fed rate hike: What it means for your CDs

If the Fed can, so can you: Hike your savings rate

How will higher interest rates help Bank of America?

What the Fed rate hike means for you

This is an updated version of a story that ran on March 17, 2022.

New York (CNN Business) The Federal Reserve is stepping up its war on inflation. That means borrowing costs are going sharply higher for families and businesses.

The US central bank increased its benchmark interest rate by three-quarters of a percentage point on Wednesday, which is the biggest single hike since 1994.

This follows the Fed's decision to raise its rate by half a percentage point in May, the biggest increase in 22 years.

The fact that the Fed is moving decisively shows confidence in the health of the job market. But the speed with which interest rates are expected to go up underscores its growing concern about the soaring cost of living.

High inflation -- consumer prices rose in May at the fastest pace in 40 years -- will likely force the Fed to raise interest rates several more times in the coming months. Fed officials may even resort to additional large rate increases in a bid to cool off inflation.

Americans will initially experience this policy shift through higher borrowing costs: It is no longer insanely cheap to take out mortgages or car loans. And cash sitting in bank accounts will finally earn something, albeit not much.

The Fed speeds up or slows down the economy by moving interest rates higher or lower. When the pandemic erupted, the Fed made it almost free to borrow in a bid to encourage spending by households and businesses. To further boost the Covid-ravaged economy, the US central bank also printed trillions of dollars through a program known as quantitative easing. And when credit markets froze in March 2020, the Fed rolled out emergency credit facilities to avoid a financial meltdown.

The Fed's rescue worked. There was no Covid financial crisis. Vaccines and massive spending from Congress paved the way for a rapid recovery. However, its emergency actions -- and their delayed removal -- also contributed to today's overheated economy.

The risk is that the Fed overdoes it, slowing the economy so much that it accidentally sparks a recession that drives up unemployment.

Borrowing costs are going up

Every time the Fed raises rates, it becomes more expensive to borrow. That means higher interest costs for mortgages, home equity lines of credit, credit cards, student debt and car loans. Business loans will also get pricier, for businesses large and small.

The most tangible way this is playing out is with mortgages, where rate hikes have already driven up rates and slowed down sales activity.

June 9. That's up sharply from under 3% this time last year. The rate for a 30-year fixed-rate mortgage averaged 5.23% in the week endingJune 9. That's up sharply from under 3% this time last year.

Higher mortgage rates make it harder to afford home prices that have skyrocketed during the pandemic. That weaker demand could cool off prices.

The median price for an existing home sold in April soared by 15% year-over-year to $391,200, according to the National Association of Realtors.

How high will rates go?

Investors are expecting the Fed will raise the high end of its target range to at least 3.75% by the end of the year, up from 1% today.

For context, the Fed raised rates to 2.37% during the peak of the last rate-hiking cycle in late 2018. Before the Great Recession of 2007-2009, Fed rates got as high as 5.25%.

And in the 1980s, the Paul Volcker-led Fed jacked up interest rates to unprecedented levels to fight runaway inflation. By the peak in July 1981, the effective Fed funds rate topped 22%. (Borrowing costs now won't be anywhere near those levels and there is little expectation that they will go up that sharply.)

Still, the impact to borrowing costs in coming months will depend chiefly on the -- as yet undetermined -- pace of the Fed's rate hikes.

Good news for savers

Rock-bottom rates have penalized savers. Money stashed in savings, certificates of deposit (CD) and money market accounts earned almost nothing during Covid (and for much of the past 14 years, for that matter). Measured against inflation, savers have lost money.

The good news, however, is that these savings rates will rise as the Fed moves interest rates higher. Savers will start to earn interest again.

But this takes time to play out. In many cases, especially with traditional accounts at big banks, the impact won't be felt overnight.

And even after several rate hikes, savings rates will still be very low -- below inflation and the expected returns in the stock market.

Markets will have to adjust

Free money from the Fed was amazing for the stock market.

Zero percent interest rates depress government bond rates, essentially forcing investors to bet on riskier assets like stocks. (Wall Street even has an expression for this: TINA, which stands for "there is no alternative.")

become accustomed to -- if not addicted to -- easy money. US stocks Higher rates have been a major challenge for the stock market, which hadbecome accustomed to -- if not addicted to -- easy money. US stocks plunged into a bear market on Monday amid fears that the Fed's aggressive rate hikes will crash the economy into a recession.

The ultimate impact to the stock market will depend on how fast the Fed raises interest rates -- and how the underlying economy and corporate profits perform going forward.

At a minimum, rate hikes mean the stock market will face more competition going forward from boring government bonds.

Cooler inflation?

The goal of the Fed's interest rate hikes is to get inflation under control while keeping the job market recovery intact.

Consumer prices spiked by 8.6% in May from the year before, the fastest pace since December 1981, according to the latest data from the Labor Department. Inflation is nowhere near the Fed's goal of 2% and has gotten worse in recent months.

Economists warn inflation could get even worse because gas prices have continued to hit record highs in recent days, exacerbating a spike that began after Russia invaded Ukraine.

Everything from food and energy to metals have become more expensive.

The high cost of living is causing financial headaches for millions of Americans and contributing significantly to record-low consumer sentiment, not to mention President Joe Biden's low approval ratings.

Yet it will take time for the Fed's interest rate hikes to start chipping away at inflation. And even then, inflation will still be subject to developments in the war in Ukraine, the supply chain mess and, of course, Covid.

CNN's Kate Trafecante contributed to this report.

Fed raises interest rates, keeps forecast for 3 hikes in 2018

WASHINGTON — Citing a brighter economic outlook, the Federal Reserve raised its key short-term interest rate Wednesday but maintained its forecast for a total of three hikes this year amid still-modest inflation.

The move is expected to ripple through the economy, nudging consumer and business borrowing costs higher, especially for variable-rate loans such as adjustable-rate mortgages and credit cards.

Investors cheered the unchanged rate forecast for 2018, pushing up the Dow Jones industrial average about 250 points initially before stocks pared their gains.

The Fed’s policymaking committee, as widely anticipated, lifted the federal funds rate — what banks charge each other for overnight loans — by a quarter percentage point to a range of 1½% to 1¾%.

More:How Federal Reserve rate hike will affect mortgages, auto loans, credit cards

That’s still low by historical standards but it marks the central bank’s fourth rate increase in the past 12 months and another vote of confidence in an economy that’s picking up steam nearly nine years after the Great Recession ended.

"We're trying to take that middle ground" on rate hikes, boosting rates enough to head off an eventual spike in inflation without derailing the economic expansion, Fed Chairman Jerome Powell said at a news conference. The meeting was the first led by Powell, a Republican and Trump appointee, who took the reins from Democrat Janet Yellen last month.

A breakdown of how the Fed sees:

How fast rates will rise

Wednesday’s rate hike was all but certain. Most of the suspense centered on whether the Fed would bump up its forecast from a total of three quarter-point increases this year to four. It held steady at three but raised its projection from two to three hikes next year as inflation picks up.

The Fed expects its key rate to climb to about 2.1% at the end of the year and 2.9% by the end of 2019 and over the longer run. It still expects “further gradual” rate increases.

With federal tax cuts and increased spending set to juice growth over the next couple of years, some analysts expected policymakers’ median projection to factor in an additional hike in 2018. That could have unnerved already volatile markets. But surprisingly tame consumer price increases likely convinced Fed officials to stand pat, at least for now.

The Fed raises rates to head off excessive inflation and lowers them to spur faster growth.

The economy

The Fed foresees the economy growing faster than it did in December. It expects growth of 2.7% this year, up from its December forecast of 2.5%, and 2.4% in 2019, up from its prior 2.1% estimate. Both top the tepid 2.2% average during the nearly 9-year-old recovery.

“The economy is healthier than it's been since before the (2008) financial crisis," Powell said,

The Fed statement said, "The economic outlook has strengthened in recent months,” an apparent nod to the $1.5 trillion Republican tax cuts and a budget blueprint that increases federal spending by $320 billion over the next decade.

The stimulus measures are poised to further jolt an economy that had already gained momentum, expanding at more than a 3% annual pace in the second half of 2017 on solid job and income growth and a strong global economy.

But while the Fed said economic activity has been rising “at a moderate rate,” it added that growth in consumer spending and business investment “have moderated from their strong fourth-quarter readings.”

Some economists worry the tax cuts and additional federal spending eventually could drive up inflation too quickly and add to the $21 trillion national debt — both of which could push interest rates higher, eventually curtailing borrowing and economic activity.

Trump's policies

Powell voiced doubt about Trump's vow to grow the economy 3% on a sustained basis. "That's well above almost all estimates," he said.

But Powell also downplayed concerns that Trump's sweeping steel and aluminum tariffs will hobble growth. "There's no thought (among Fed policymakers) that changing trade policy should have any effect on the current outlook," Powell said, unless the current trade conflict escalates significantly.

Jobs

The Fed said the “labor market has continued to strengthen,” adding that “job gains have been strong in recent months, and the unemployment rate has stayed low.”

Employers added more than 200,000 jobs in January and a booming 313,000 in February. Policymakers expect the 4.1% unemployment rate to fall to 3.8% by the end of the year, below their previous forecast of 3.9% and 3.6% by the end of 2019, below their prior estimate of 3.9%.

Very low unemployment is likely to accelerate tepid wage growth as employers compete for fewer available workers. And companies that lift worker pay ultimately increase consumer prices to maintain profits.

Inflation

Inflation has been the big conundrum. Despite the solidly growing economy, the Fed noted that annual inflation has continued to run below the Fed’s 2% target. It reiterated, however, that inflation “is expected to move up in coming months and to stabilize” around the Fed’s 2% benchmark “over the medium term.”

Policymakers expect annual inflation to rise from 1.7% to 1.9% by year-end and 2% by the end of 2019, unchanged from their December forecast. They still expect a core measure that strips out volatile food and energy items to increase from 1.5% to 1.9% by year-end, but slightly pushed up their forecast for the end of 2019 to 2.1%. In short, inflation won’t reach the Fed’s 2% goal until next year.

While the Fed generally wants to keep a lid on consumer price increases, sluggish inflation can signal a listless economy and pose a risk of falling prices that can hurt economic growth. Some economists point to long-term factors that have held down prices, such as the globally-connected economy and e-commerce.

Markets

The Dow Jones industrial average, which had been up about 130 points prior to the Fed announcement, initially jumped to a 250 point gain after the news. It then settled back to just a 13-point gain for by mid-afternoon. The 10-year Treasury bond yield, a benchmark for long-term rates, edged up marginally, from 2.89% to 2.91%.

Still, investors liked the status quo rate forecast for this year. Stock prices tend to dive at the prospect of higher interest rates because they make lower-risk bonds relatively more attractive. Higher rates can also crimp lending and the economy.

Markets expect the Fed to gradually raise rates, but a boost in the Fed’s forecast to four hikes this year may have spooked investors who are already on edge. The unchanged rate forecast for 2018 allayed those worries.

What it means

Fed officials are struggling to balance an economy that appears poised to heat up with inflation that has remained puzzlingly docile.

So far, they’re taking a middle-ground approach and lifting rates gradually – at least until inflation ratchets higher, a development some economists expect later in the year.

Scott Anderson ,chief economist of Bank of the West, says Powell's bullish view of the economy raises the odds for four rate hikes this year. Seven Fed policymakers now expect that many, up from four in December, he notes.

"I think it's a more confident (Fed) about where the economy is going to be," Anderson says.

Federal Reserve issues biggest interest rate hike in 22 years - CNN

New York (CNN Business) The Federal Reserve said Wednesday it is raising interest rates by a half-percentage point to get a handle on the worst inflation America has seen in 40 years.

It's the first time in 22 years that the central bank has hiked rates this much. The decision was unanimous, with all 12 members of the policy-setting Federal Open Market Committee agreeing on it.

In March, the Fed ramped up its benchmark borrowing rate for the first time since late 2018, increasing it by a quarter-percentage point.

In his post-meeting press conference on Wednesday, Fed Chairman Jerome Powell said that additional half-percentage-point rate hikes will be on the table for the next few meetings. But the bank isn't looking to go bigger:

"A 75 basis point increase is not something the committee is actively considering," Powell told reporters. "If inflation comes down we're not going to stop, we're just going to go down to 25 basis point increases," he added.

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