Fed raises key rate in bid to tame inflation

Move expected to raise costs of borrowing money.

The Federal Reserve intensified its fight against the worst inflation in 40 years by raising its benchmark interest rate by a half-percentage point Wednesday

its most aggressive move since — 2000 and signaling further rate — hikes to come.

The increase in the Fed’s key short-term rate raised it to a range of 0.75% to 1%, the highest point since the pandemic struck two years ago.

The Fed also announced it will start reducing its huge $9 trillion balance sheet, made up mainly of Treasury and mortgage bonds. Reducing those holdings will have the effect of further raising loan costs throughout the economy.

What is the Fed’s goal?

With prices for food, energy and consumer goods accelerating, the Fed’s goal is to cool spending — and economic growth — by making it more expensive for individuals and businesses to borrow.

The central bank hopes that higher costs for mortgages, credit cards and auto loans will slow spending enough to tame inflation yet not so much as to cause a recession.

It will be a delicate balancing act. The Fed has endured widespread criticism that it was too slow to start tightening credit, and many economists are skeptical it can avoid causing a recession.

Are more increases coming?

Speaking at a news conference Wednesday, Chair Jerome Powell made clear further rate hikes are coming. He said that additional half-point increases in the Fed’s key rate “should be on the table in the next couple of meetings” in June and July.

But Powell also sought to downplay any speculation the Fed might

be considering a rate hike as high as three-quarters of a percentage point.

“A 75-basis-point hike is not something that the committee is actively considering,” he said — a remark that appeared to cause stock indexes to jump.

At his news conference, Powell stressed his belief that “restoring price stability” — that is, curbing high inflation — is essential to sustaining the economy’s health.

How did markets react?

Stocks soared to their biggest gain in two years Wednesday and bond yields dropped after the announcement.

The Dow Jones industrial average closed up more than 900 points, while the S&P 500 jumped 3%.

Will mortgage rates keep going up?

Rates on home loans have soared in the past few months, partly in anticipation of the Fed’s moves, and will probably keep rising.

Mortgage rates don’t necessarily move up in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasurys.

For now, though, faster inflation and strong U.S. economic growth are sending the 10-year

Treasury rate up sharply. As a consequence, mortgage rates have jumped 2 full percentage points just since the year began, to 5.1% on average for a 30-year fixed mortgage, according to Freddie Mac, up from 3.1% at the start of 2022.

In part, the jump in mortgage rates reflects expectations the Fed will keep raising rates. But its forthcoming hikes aren’t likely fully priced in yet. If the Fed jacks up its key rate to as high as 3.5% by mid-2023, as many economists expect, the 10-year Treasury yield will go much higher, too, and mortgages will become much more expensive.

How will that affect the housing market?

If you’re looking to buy a home and are frustrated by the lack of available houses, which has triggered bidding wars and eye-watering prices, that’s unlikely to change anytime soon.

Economists say that higher mortgage rates will discourage some would-be purchasers. And average home prices, which have been soaring at about a 20% annual rate, could at least rise at a slower pace.

The surge in mortgage rates “will temper the pace of home price appreciation as more would-be homebuyers are priced out,” said Greg Mcbride, chief financial analyst for Bankrate.

Still, the number of available homes remains historically low, a trend that will likely frustrate buyers and keep prices high.

What about other kinds of loans?

For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise by roughly the same amount as the Fed hike, usually within one or two billing cycles.

That’s because those rates are based in part on banks’ prime rate, which moves in tandem with the Fed.

Those who don’t qualify for low-rate credit cards might be stuck paying higher interest on their balances. The rates on their cards would rise as the prime rate does.

Should the Fed decide to raise rates by 2 percentage points or more over the next two years — a distinct possibility — that would significantly enlarge interest payments.

The Fed’s rate hikes won’t necessarily raise auto loan rates as much. Car loans tend to be more sensitive to competition, which can slow the rate of increases.

AP INTEREST RATES “Inflation is much too high,” Federal Reserve Chairman Jerome Powell said Wednesday. The Fed’s move to cool spending by tightening credit could raise interest rates on mortgages, auto loans and credit cards.