Interest Rate Increase: Why did the Fed raise interest rates?

As 2022 draws to a close the year will be best remembered for the cost of living crisis that engulfed the United States, especially during the summer months. Following two years of COVID-enforced lockdowns, the United States witnessed a supply chain shortage that saw the price of everyday grocery price items skyrocket during the first two months of the year. However, the country’s struggles were compounded when it decided to impose strict sanctions on Russian oil imports following its invasion of Ukraine in March. The consequence of these sanctions was that the price of gas skyrocketed across the country with June witnessing the average price surpassing a gallon of gas five dollars for the first time in United States history. With America in the midst of a cost-of-living crisis, the Federal Reserve has implemented a series of interest rate hikes that have ultimately stimied the rapidly increasing rate of inflation and lowered the price of basic necessities such as gas, groceries and electricity, to the benefit of everyday Americans. In fact, on Wednesday, December 15, 2022, the Federal Reserve decided to implement another interest hike by another 0.5 percentage points moving the range to 4.25 to 4.5 percent. What does this mean for you? A higher interest rate means that the cost of borrowing goes up with the interest payment on loans higher than before. The recent interest rate hikes have already wreaked havoc on the housing market with several Americans now wary about homeownership given the higher interest payments. Given the latest hikes, one of the most prudent steps anyone could follow is to pay down any variable debt such as credit card debt. Credit cards have a variable interest rate meaning that those rates are directly linear to the Federal Reserve’s benchmark. With interest rate hikes set to continue in 2023, consumers are likely to avoid making any large purchases such as cars or houses.

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