The Federal Reserve is set to raise interest rates after seven hikes last year, as the central bank tries to tamp down inflation while avoiding a recession.
The Fed’s monetary policy committee is meeting in the nation’s capital Jan. 31-Feb. 1 for its first meeting of 2023. The country continues to grapple with economic issues as consumers weather the strain of inflation woes and recession fears.
Here’s what you need to know about the Fed’s interest rate hikes:
Seven hikes in the last year
The Federal Open Market Committee, the panel of Fed officials responsible for setting monetary policy, punched up interest rates seven times last year: in March, May, June, July, September, November and December.
The Fed’s baseline interest rate range affects overnight lending between U.S. banks and influences credit cards, automobile loans, mortgages and credit products. Higher interest rates tend to slow the economy and reduce inflation, while lower interest rates are meant to stimulate the economy and increase employment.
Last year’s seven-hike string amounts to the most alterations the Fed has made to interest rates since 2008, when the bank cut rates seven times during the financial crisis and Great Recession.
The nation then enjoyed historically low interest rates for more than a decade after the Great Recession as policymakers attempted to get the economy back on its feet. The Fed slowly hiked interest rates between 2015 and 2018, but reversed some of those increases in 2019 before slashing rates again during the onset of the COVID-19 pandemic in 2020.
A smaller hike on the horizon?
The Fed’s first hike of the cycle in March increased the federal funds rate by 25 basis points — or 0.25 percentage points — and was followed in May by a 50 basis-point bump.
The Fed then issued four consecutive increases of 75 basis points in June, July, September and November before downshifting to a 50 basis-point increase in December.
The bank is expected to issue a 25 basis-point hike Wednesday, which would be its smallest increase since last March.
Do rate increases work?
The recent onslaught of interest rate hikes have been aimed at curtailing record-high inflation, which was spurred by a range of factors, including pandemic-related roadblocks, supply chain issues and trillions of dollars in federal stimulus.
The Fed’s changes are an effort to balance out the economy, but officials have acknowledged that raising rates too high for too long could come with the consequence of a possible recession.
The Fed hiked its baseline interest rate to a peak of 19 percent in 1980 as it tried to control the Great Inflation — and though the move triggered a recession, the tighter monetary policy was eventually able to bring inflation down after a few years.
What do rate hikes mean for consumers?
Inflation has appeared to cool, but consumers are still feeling its effects.
Prices at the gas pump have come down after spiking to an average of more than $5 a gallon in the wake of Russia’s invasion of Ukraine early last year, but trackers now suggest the cost may climb again and could hit $4 in the next few months.
And the costs of other goods are also still climbing, as evidenced by lawmakers’ recent calls to investigate soaring egg prices, which have more than doubled since last year, according to the Bureau of Labor Statistics, from $1.79 for a dozen in December 2021 to $4.25 in December 2022 amid an outbreak of avian flu.
While the U.S economy is not yet in recession, some sectors such as the housing market have experienced deep declines.
Higher mortgage rates have made it harder for Americans to buy homes, especially as they feel the strain of inflation in the price of food, gas and other necessities.
The University of Michigan’s consumer sentiment index was at 64.9 this month, up from 59.7 in December, indicating Americans are feeling better about the economy, but still 3.4 percent lower than this time last year.
Will the rate increases end?
Fed Chairman Jerome Powell has indicated that the central bank is scaling back on its interest rate increases, though it’s unclear exactly when hikes will stop altogether.
After the monetary policy committee concludes later this week, Powell is expected to underscore that the Fed’s fight against inflation is ongoing, and that the effects of the increases are still being examined.