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Why does the Fed keep raising interest rates? 3 expert tips to get by



On November 2, the Federal Reserve raised interest rates again, the sixth consecutive increase this year – and the fourth consecutive increase of 75 basis points since June.

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The targeted interest rate on federal funds is now 3.75% to 4%, per CNN, the highest since 2008, when the housing crisis weighed heavily on the US economy and forced the country into a recession. CNN also reported that the 2022 actions come amid “the Fed’s toughest policy action since the 1980s,” affecting everything from mortgages to auto loans to credit cards.

As GOBankingRates previously reported, analysts believe we will soon “surpass” the record high 19% credit card interest rate set in 1991. “Most credit cardholders should see the rise Fed rates will trickle down to their rate within a statement cycle or two,” said Ted Rossman, senior industry analyst at Creditcards.com.

Why the Fed keeps raising interest rates

Given the hardship this is imposing on the American people — already grappling with economic hardship caused by the pandemic and now with 40-year high inflation rates — why does the Fed continue to raise interest rates? interest ?

Simply put, the Fed explained that it was trying to rein in that same inflation that affects people’s wallets. According to the latest Consumer Price Index data, Americans are currently paying 8.2% more across all categories compared to the same period last year, including a 58.1% increase in prices fuel and a 13% increase in the cost of groceries.

“If we don’t get inflation under control…we’re now in a situation where inflation is now entrenched and employment costs, in particular, will potentially be much higher,” Fed Chairman Jerome said. Powell, to reporters at a Nov. 2 press conference. conference, per CBS, rationalizing the Fed’s decision and also hinting that this may not be the last interest rate hike we’ll see. Powell added: “It’s very premature to think about taking a break.”

Experts weigh in on Fed hikes and the broader economy

Chris Miles, cash flow expert and CEO of financial advisory firm Money Ripples, has another opinion. When it comes to why the Fed keeps raising rates, he thinks it’s not so much about controlling inflation, but “at the end of the day, their #1 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. This is because we were the first to start raising rates, and that 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.

According to him, Miles thinks the Fed will continue to raise rates more than initially expected. “At the September Fed meeting, [Chair] Powell inferred that he would support the rate hike until the Fed rate rose above the CPI. Right now, the CPI is still at 8.2%. They just raised the Fed rate to 4%,” says Miles, adding, “Until this week, many pundits thought it would hit around 4.6%. Now they’re estimating around 4.8%.” Regarding his prediction, Miles thinks “the rate will rise 5.5% to 6% before starting to level off as inflation starts to slow.”

However, Miles thinks recent Fed actions will eventually slow inflation, “as long as they slow the supply of credit.” Miles says one of two things has to happen to achieve this. “Either they have banks that have become very restrictive on loan approvals, like in 2008-2009. Or they raise interest rates to the point that fewer people apply for credit.

As he adds, the savings are based on the availability of credit. “The more money available, the faster the money can flow. Ironically, it was the Fed’s decision, along with political pressure, that caused it to release unprecedented amounts of liquidity, driving inflation out of control. They now swing the pendulum the other way to slow it down.

Tips for coping with rising interest rates

Miles notes that these moves are now negatively impacting the poor and middle class and disrupting most people’s retirement accounts as stocks fall. So what can the average American do to cope and be proactive as interest rates keep skyrocketing? Miles has some advice:

Repay variable rate loans. “The best thing consumers can do right now is pay off their variable interest loans, like credit cards. Don’t focus so much on paying off lower fixed rate loans, like mortgages, cars, student loans, etc. Focus on eliminating all variable rate loans and building up your cash reserves.

Focus on having cash in hand. “Cash may seem counter-intuitive, but I think cash is going to become a very valuable commodity as more and more people’s savings dwindle and future layoffs are very possible.”

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Invest in real estate – if you can. “For those who don’t have a lot of debt and have a lot of money, I would focus on owning real estate, like profitable rental real estate, especially in certain markets, like the Midwest or the Southeast. Avoid hot markets like Phoenix, Florida, Texas, Las Vegas or anything in the western US These prices are already falling But even in these markets as prices stabilize and as the sellers get more and more desperate, it’s starting to turn back into a buyers’ market again.

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