West News Wire: As anticipated, the Federal Reserve increased interest rates by another 25 basis points on Wednesday, bringing the benchmark rate to its highest level since 2007.
The purpose of raising interest rates for the ninth time in a row is to deter inflation by raising the cost of borrowing, which might slow the economy and possibly cause a recession. It consequently drives up the rising cost of loans, credit cards, and vehicle financing.
With this change, the federal funds rate has gone up from almost zero in March 2022 to a range of 4.75% to 5%.
There was considerable speculation that the recent bank failures, particularly Silicon Valley Bank, may cause the Fed to delay raising interest rates. However, Federal Reserve Chair Jerome Powell has repeatedly said that price stability is the central bank’s “overarching focus.
The year-of-year over rate of inflation has slowed to 6%, but it’s still above the Fed’s preferred rate of 2%.
Rate hikes are often referred to as a “blunt instrument” because they affect the entire financial system. The effects are also hard to gauge, since it can take many months for a rate hike to be fully absorbed by the economy.
Since each rate hike adds to the risk of a recession, the Fed has slowed its increases somewhat, opting for 25 basis point hikes in February and March instead of the 75 basis point increases it enacted in late 2022. Despite the Fed slowing its roll, Powell has repeatedly said inflation remains a top priority.”
“Restoring price stability is essential to set the stage for achieving maximum employment and stable prices over the longer run,” Powell said in his semiannual report to Congress earlier this month. “The historical record cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”
Interest rates on a five-year car loans have nearly doubled since January 2022, from 3.86% to 6.48%, according to Bankrate data. Alongside rising car prices, many buyers have been priced out of the growing costs of owning a vehicle.
The interest rate on fixed federal loans has climbed from 3.73% to 4.99% in the last year, and will likely rise again for new loans disbursed after July 1.
The current annual percentage rate (APR) for credit cards is just over 20%, after climbing steadily from about 16% in early 2022. The latest rate hike will likely push up the average APR slightly, but not above 21%, according to Bankrate.