After three years, the Federal Reserve has finally begun hiking rates to help stem rising inflation. With the latest 7.9% inflation print, inflation is now at a 40-year high.
The Federal Reserve has telegraphed it will hike the Fed Funds rate 6-7 times over the next 12 months. Therefore, we could easily see 1% – 1.75% higher Fed Funds rates in the near future.
The Fed is behind the curve when it comes to hiking rates. And that’s understandable. The Fed would rather be a little too slow in hiking rates than a little too fast in order to help our economy survive a pandemic.
Put another way, which would you rather have, higher inflation and a stronger labor market, or lower inflation and a weaker labor market? The former is usually preferred. In an ideal world, the Fed would love to have 2%-2.5% inflation and 3.5% – 4% unemployment levels.
But the reality is, the upcoming Fed rate hikes will have a negligible impact on your finances, especially if you have been a regular Financial Samurai reader. Fed rate hikes won’t make borrowing costs that much greater. Therefore, for those of you who like to take out credit card debt, auto loans, student loans, and mortgage rates, I wouldn’t worry too much.
Let’s break down how Fed rate hikes will affect borrowing costs for each category.