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On November 2, the Federal Reserve hiked interest rates again, the sixth consecutive hike this year — and the fourth consecutive 75 basis point hike since June.
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The target interest rate on federal funds is now 3.75% to 4%, according to CNN, the highest level since 2008, when the housing crisis hit the American economy hard and pushed the country into recession. CNN also reported that the 2022 measures come as “the toughest policy moves by the Fed since the 1980s,” affecting everything from mortgages to auto loans to credit cards.
As GOBankingRates previously reported, analysts believe we’ll “break” the 1991 cap on credit cards in a billing cycle or two,” said Ted Rossman, Senior Industry Analyst at Creditcards.com.
Why the Fed keeps raising interest rates
Given the dire hardship this is causing for the American people – already struggling with the economic woes of the pandemic and now with 40 years of high inflation – why is the Fed continuing to hike rates?
Simply put, the Fed has stated that it is trying to curb the very inflation that is affecting people’s wallets. According to the latest CPI data, Americans are currently paying 8.2% more than a year ago at this time in all categories, including a 58.1% increase in fuel prices and a 13% increase in food costs.
“Unless we get inflation under control… we are now in a situation where inflation has become entrenched and in particular employment costs will potentially be much higher,” Fed Chair Jerome Powell told reporters at the Nov. 2 conference, per CBS, which rationalizes the Fed’s decision and also hints that this may not be the last rate hike we’ll see. Powell added, “It’s very premature to think of a break.”
Pundits weigh Fed rate hikes and broader economy
Chris Miles, cash flow expert and CEO of financial advisory firm Money Ripples, has a different opinion. When it comes to why the Fed keeps raising rates, he says it’s not so much about controlling inflation as “ultimately their primary job is to protect the value of the US dollar,” he says. “You may have noticed that the US dollar is strong around the world. That’s because we were the first to start raising interest rates, and that’s attracted money from other countries to invest in our dollar…the Fed wants to be sure that our dollar is more valuable than any other currency right now. “
In his opinion, Miles believes the Fed will continue to hike rates, more than originally forecast. “At the September Fed meeting [Chair] Powell concluded that he would support rate hikes until Fed rates exceed the CPI. The CPI is currently still at 8.2%. They just raised the Fed rate to 4%,” says Miles, adding: “Up until this week, many pundits believed it would hit about 4.6%. Now they’re estimating around 4.8%.” As far as his prediction goes, Miles believes “the rate will rise to 5.5% to 6% before starting to settle down as inflation starts to slow.”
However, Miles believes the Fed’s recent moves will eventually slow inflation “as long as they slow the supply of credit.” Miles says that one of two things has to happen for this to happen. “Either the banks have become very restrictive on lending, like in 2008-2009. Or they raise interest rates enough that fewer people apply for a loan.”
As he adds, economies are based on the availability of credit. “The more money that is available, the faster money can be moved. Ironically, it was the Fed’s decision, coupled with political pressures, that caused it to make unprecedented amounts of cash available that caused inflation to spiral out of control. You are now swinging the pendulum the other way to slow it down again.”
Tips for dealing with higher interest rates
Miles notes that these moves are now affecting the poor and middle class the most, messing up most people’s retirement accounts as stocks fall. So what can the average American do to cope and be proactive as interest rates continue to soar? Miles has some tips:
Pay off variable rate loans. “The best thing consumers can do right now is pay off their adjustable-rate loans like they do credit cards. Don’t focus so much on paying off the lower fixed rate loans like mortgages, cars, student loans, etc. Focus on eliminating all adjustable rate loans and build your cash reserves.”
Focus on having cash on hand. “Cash may sound counterintuitive, but I believe that cash will become a very valuable commodity as more people’s savings disappear and future layoffs are very likely.”
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Invest in real estate – if you can. “For those who don’t have a lot of debt and a lot of cash, I would focus on owning real estate, such as. B. Profitable rental properties, particularly in certain markets such as the Midwest or Southeast. Avoid hot markets like Phoenix, Florida, Texas, Las Vegas or anything in the western US. Those prices are already falling. But even in those markets, as prices settle down and sellers become more desperate, it becomes a buyers’ market again.”
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