The fed raised rates AGAIN: What the fight against inflation means for you

The last two years have been characterized as “unprecedented times.” While historians and economists will tell you there’s very little that truly breaks precedence—we’ve experienced pandemics, inflation, and recessions before—the economic volatility of the past few years is indeed hard to ignore.

The latest chapter in this saga: Interest rates.

Interest rates and inflation, that is—the two are so closely connected, we can hardly talk about one without the other.

Why interest rates are rising in 2022

Today, the Federal Reserve (the Fed) raised the Fed Funds rate by another 75 basis points for a new range of 3.75% to 4%.

This follows five previous increases so far this year, with even more raises planned for 2022 and 2023.

One of the main functions of the Federal Reserve is to stabilize and stimulate the U.S. economy. They do this by adjusting the cost of borrowing for consumers and companies—lower interest rates increase borrowing and purchasing; higher rates deter it. The changing interest rate by the Fed is an attempt to pull money out of the economy or push more money into the economy.

At the beginning of the pandemic, when the economy slowed and businesses risked shutting down and workers feared losing jobs, the fed slashed the interest rates to 0% and .25% to encourage spending and stimulate the lethargic economy.

Now, with inflation hitting a 40-year high, the fed is increasing interest rates to return growth to sustainable levels.

The idea is because higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, causing inflation to fall.

Will interest rates rise in 2023?

The message from the Federal Reserve Board in September was that they will continue to raise rates until inflation approaches their target of 2%.

Currently, inflation measured by the Consumer Price Index (CPI) is 8.5%.1

A look at the Fed Fund futures contracts over the next several months can give us some insight into future rate hike expectations, and by December 2022, rates could be as high as 4%. However, these contract prices can be volatile and change rapidly.

How rising interest rates affect you

Interest rates track the cost of borrowing between banks and other depository institutions, indirectly affecting different savings and borrowing rates.

Here’s a few places you can expect changes:

Stock market: If spending decreases and borrowing becomes more expensive, companies may become less profitable or cut back on growth, which has the potential to lower the price of their stock in the short-term. If this happens to enough companies, the stock market could temporarily go down as a result.

Bonds: As interest rates increase, bond prices tend to fall; when rates decrease, bond prices rise. Investors buying bonds in a higher-interest-rate environment can expect higher yields.

Student loans: Student loan rates tend to go up with interest rates. If you have a fixed-rate loan, it will not be affected by shifting rates. However, new loans will have higher interest rates during this period, as will any variable interest rate loans.

Mortgages and other loans: Like student loans, any existing fixed-rate loan will be unaffected by the Fed’s rate increase. Areas that are affected include any variable-rate mortgages, real estate loans, business loans, Home Equity Lines of Credit (HELOC), and other lines of credit. Additionally, new mortgages and new vehicle loans will be affected by the high rates.

Savings accounts and certificate of deposits (CDs): Often interest on savings accounts and CDs increase along with the Fed rate, making them a more secure option. Current savings and CD interest rates are lagging the Fed interest rate.

What you can do about rising interest rates

When volatility is surging, the first step is always to quiet the noise.

Your financial values and goals do not change with the markets; and therefore, big swings in your strategy are not advised.

However, your finances don’t exist outside of the U.S. economic system. We are aware of volatility but not preoccupied with it, flexible within the economy but not reacting to it.

As interest rates continue to rise, we recommend evaluating your asset allocation, potentially strategizing student loan repayment and other debt priorities, and shifting your investing and savings strategy to adapt to the shifting landscape.

At the same time, remind yourself you’re in this for long-term financial comfort and strength, and your long-term habits and mindsets will outlive the headlines.

Don’t hesitate to reach out to learn how my team and I can help you discern your next step!

James Jaderborg, CLU®, ChFC®

Author: James Jaderborg, CLU®, ChFC®

James Jaderborg specializes in working with business owners, physicians, and medical professionals to help them overcome financial challenges unique to their careers.

Registered Representative of Cetera Advisor Networks, LLC and Investment Advisor Representative of Cetera Investment Advisers, LLC.

1United States inflation rate- September 2022 data. Retrieved October 5, 2022, from

Photo by AgnosticPreachersKid, CC BY-SA 3.0, via Wikimedia Commons

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

5073150/DOFU 11-2022