To tackle inflation, the central bank hiked interest rates by 0.75 percent yesterday for the second month in a row. It’s a historic move.
What does that mean? The Federal Reserve only has one tool to combat economic inflation: increasing national interest rates. Increased interest rates make it more expensive to borrow money, meaning fewer people will take out loans, mortgages, and other forms of borrowing. Because of that, there will be less money flowing through the markets. The goal is to slow down the economy and, in turn, inflation.
Raising rates too much could tip the economy into a hard recession. Technically, the United States officially entered a recession today with the announced second consecutive drop in GDP. But the economic situation could worsen if the Federal Reserve’s strategy is too extreme.
How will this affect you? Credit card rates, house mortgages, car loans, and all forms of borrowing will get more expensive. Savings rates will increase, incentivizing many to hold onto their money instead of spending it. It will feel like the economy is gen