Oops, they did it again.
The Federal Reserve announced its fifth consecutive interest rate hike on Wednesday, bumping up the target federal funds rate by 0.75% to reach a range of 3% to 3.25% in its ongoing battle against inflation in the U.S. It hasn't been this high since 2008.
The Fed's September rate hike isn't a surprise. The nation's central banking system has been raising interest rates for months to try to decrease inflation, which it generally likes to see around 2% over the long run in order to promote a healthy economy. In August, inflation reached 8.3% before seasonal adjustment.
Inflation is so high due largely to the economy's strong pandemic recovery, snarls in the supply chain and Russia's invasion of Ukraine. But those factors — as well as moves by the Fed — can seem irrelevant to everyday Americans scrounging to pay for more expensive groceries and gas.
Here's what you need to know about Wednesday's announcement and how it will actually impact you.
Why did the Fed raise interest rates again?
One of the Fed's main jobs is to oversee "the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices," according to its website.
That basically means it's in charge of making sure inflation doesn't get too high — not only because higher prices make life more difficult for consumers, but also because they can decrease demand, ultimately hurting the economy.
If you've bought anything lately, you've likely noticed that inflation is running high. Food prices, for instance, are up 11.4% over the last year, the biggest 12-month uptick since 1979. The Fed is tasked with bringing inflation down, and manipulating interest rates is one way it can do that.
But isn't inflation getting better?
August's 8.3% number is a decrease from the ultra-high inflation numbers we saw earlier this year (like 9.1% in June and 8.5% in July). On a monthly basis, prices for items like airfare, gas and used cars are falling.
Even so, inflation is way above the 2% benchmark the Fed prefers. While low, stable inflation is normal, some categories are seeing runaway spikes: The cost of shelter (rent) is up 6.2% from August 2021. Medical care costs have surged 5.4%, and new car prices have grown by 10.1%.
So there's a long way to go, and the Fed is poised to stay the course: "The [Federal Open Market Committee] is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done," Fed Chair Jerome Powell said at a Wednesday news conference.
In fact, some experts say inflation is so out of control that the Fed should be acting even more drastically. Steven Blitz, chief U.S. economist at global research provider TS Lombard, told the Wall Street Journal that a 0.75% hike amounts to "rolling the dice on the hope that lower commodity prices and a slowing global economy will deliver a lower inflation rate."
Is the Fed going to cause a recession?
In an August speech, Powell hinted that the Fed is so committed to slashing inflation that it may slow the economy's growth and trigger some "some softening of labor market conditions" — aka drive up unemployment. He acknowledged this will "bring some pain to households and businesses."
"No one knows whether this process will lead to a recession, and, if so, how significant that recession would be," he said Wednesday.
Some experts do predict a recession could be on the horizon. In a CNBC survey of economists, money managers and strategists earlier this summer, 63% of respondents said the Fed's moves would cause a recession. Bloomberg's editorial board published an opinion piece Wednesday declaring that "The Fed Should Be Willing to Cause a Recession."
Sen. Elizabeth Warren, D-Mass., has been emphatically raising the alarm, telling CNN in late August that she's "very worried that the Fed is going to tip the economy into recession."
"What’s worse than high prices and a strong economy is high prices and millions of people out of work," Warren reportedly added.
What does the Fed rate hike mean for me?
By raising the federal funds rate, the Fed is making it more expensive for banks to borrow money from each other, causing a ripple effect that will in turn make borrowing more expensive for consumers. Online banks may again increase interest rates on high-yield savings accounts in a bid to convince customers to keep their deposits at the bank.
Credit card APRs (annual percentage rates) will likely continue to rise, meaning carrying debt will cost you more. So if you can, it's especially important to pay your credit card bills in full and on time every month. If you can't, make sure the balance is on your card with the lowest APR.
Fluctuations in the stock market are to be expected, as well, but "it's premature for investors to tear up their existing playbook based on a single volatile data point and tough talk, but not yet really painful action, from central banks," Jason Draho, head of Asset Allocation Americas at UBS Global Wealth Management, wrote Wednesday.
It's unclear how the rate hike may influence mortgage rates, which have been rising for months and depressing home sales (as well as prices) in the process. There's not a cut-and-dried correlation here: After the July rate hike, mortgage rates actually dropped.
Nonetheless, Lawrence Yun, chief economist for the National Association of Realtors, said in a news release that "the housing sector is the most sensitive to and experiences the most immediate impacts from the Federal Reserve’s interest rate policy changes."
That said, it's still possible to buy a home if you do your research and set a budget, as Glenn Brunker, president of Ally Home, wrote in a email to reporters. He added that house hunters should "think of it as a game of chess where some costs may move in one direction and some in another."