Fed Hikes Rates for the 10th Time. Experts Weigh In on What's Next

This may be the last rate hike for the year, but we're not out of the woods yet.

Dashia Milden Editor
Dashia is a staff editor for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.
Marcos Cabello
Based in Boston, Marcos Cabello has been a personal finance reporter for NextAdvisor and CNET. Marcos has covered cryptocurrency, investing, banking, and the US economy, among other personal finance subjects. If you don't find Marcos behind his computer screen, you'll probably find him behind another screen, playing the newest Nintendo Switch title, streaming the latest TV show or reading a book on his Kindle.
Dashia Milden
Marcos Cabello
6 min read
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The Federal Reserve just raised interest rates for the 10th time in just over a year. 

James Martin/CNET

The Federal Reserve issued its 10th consecutive rate hike since March 2022, pushing the federal funds rate to a target range between 5% and 5.25%, the highest level since 2007. It's clear that while inflation is improving, the Fed's job isn't done. 

"The rate increase is a signal that the fight against inflation is far from over, despite signs that things are heading in the right direction," said Bruce McClary, senior vice president for communications at the National Foundation for Credit Counseling. "It has been more than a decade since we have seen rates this high."

With inflation slowing and jobless claims still below historical averages, some experts expected the Fed to pause its rate hikes this month. However, with another bank failure in the news -- the recent collapse of First Republic Bank -- and inflation still not at the 2% target, the Fed's decision to raise rates incrementally is unsurprising. 

"My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal," said Fed Chair Jerome Powell at the Federal Open Market Committee meeting press conference

Since early 2022, the Federal Reserve has been working to temper rising prices and tame runaway inflation. From groceries to gas, everyday essentials have gone up in cost. In response, the Fed has aggressively raised interest rates to try to bring down prices. As the Fed raised rates, the cost of borrowing for loans, credit cards and mortgages also increased, making financing less affordable. However, this has also led to increased interest rates for savingscertificates of deposit and money market accounts

Although this rate increase will make borrowing even more expensive, the most important takeaway from the May Fed meeting is the Fed signaling a pause in hikes going forward, said Tom Graff, head of investments at Facet.

Here's what you need to know about inflation, what's next for the economy and how to safeguard your money.

What's going on with inflation?

Inflation now sits at 5% year over year, according to the Bureau of Labor Statistics. That's a stark difference from last year, when inflation hit record-breaking levels in June with a 9.1% yearly increase. From February to March, most categories saw an overall cost decrease, with some exceptions such as housing and food away from home. But despite slowing inflation, prices are still up across the board, making it harder for your dollar to stretch as far.

During periods of high inflation, your dollar has less purchasing power, so everything you buy is more expensive, even though you may not be getting paid more. Despite signs that inflation is cooling, many Americans continue to live paycheck to paycheck, and wages aren't keeping up with inflation rates. 

One of the Fed's responsibilities is to keep inflation low, ideally around 2%. The previous Fed rate hikes seem to have helped lower inflation, but prices remain high, indicating there's still some work to be done.

What another rate hike means for the economy 

Prices won't drop overnight. Experts predict 2023 will be another rough year as the cost of living remains high and interest rates push up the cost of borrowing.

Many experts predict the Fed's aggressive rate hikes will send us into a recession: a shrinking rather than a growing economy. The Fed acknowledges the adverse effects and potential risks of this restrictive monetary policy. And at this point, a recession seems unavoidable.

"I see the likelihood of a recession at 70% right now," said Derek Delaney, certified financial planner and founder of PharmD Financial Planning, in March. If unemployment goes up, a recession could come sooner -- but what happens next with inflation will play a key role in the likelihood and magnitude of a recession.

"Inflation was never going to revert back to a normal level without some economic slowing," said Graff, a message that Powell has made clear for months. "Still, there's risk of some pain resulting from this slowdown."

What this means for your money

The most recent Fed rate hike means that borrowers will continue to see higher interest rates on mortgagescredit cards and personal loans. On the flip side, as interest rates remain high, you can benefit from boosted earnings on your savings. 

"The Fed rate hike can lead to higher returns on savings accounts. That is the positive side of the equation," said McClary. "The bad news is associated with the impact on the cost of borrowing. If you owe, you will pay more."

If you have debt or are worried about future economic uncertainty, here are some steps you can take now to prepare.

Tackle outstanding debt 

Raising rates for the 10th time, even a little, means banks will follow suit, pushing up the cost of financing a car or buying a home. Higher rates also make it more expensive to refinance your mortgage or student loans. Moreover, the Fed hikes indirectly drive up interest rates on credit cards, so if you carry a balance from month to month, repaying your debt becomes more expensive.

Before taking on a new loan or mortgage, understand exactly what you'll owe: the payment schedule, potential fees and interest rate. Make a debt payoff plan to knock down balances as quickly as you can for any outstanding debt.

"Look at the numbers and make deliberate choices," said Bobbi Rebell, a certified financial planner and author of Launching Financial Grownups. "And also communicate with your family because very few of us operate in an economy of one." Consider transferring outstanding high-interest debt to a lower or fixed interest rate option, if possible, she said. You may also consider a balance transfer card -- as long as you plan to pay the balance before interest accrues -- or a debt consolidation loan.

Check whether your debt carries a fixed or variable interest rate. Many personal and mortgage loans have fixed rates, so if you borrowed recently, you might have a high-interest rate that'll carry through the loan's lifetime. On the other hand, most credit cards have a variable interest rate -- meaning the already very high APR (averaging over 20% right now) on any balances will only grow as rates rise. 

And, even if we've seen the last of the Fed's rate hikes for some time, remember that the cost of borrowing won't decrease overnight. "If the Fed were to slow down or stop raising rates, that doesn't necessarily mean your rate is going down. It just might mean that it's not going up," said Rebell. Don't wait to take action. If you need to move debt to a fixed-rate loan, it's better to move now in case rates increase even more in the coming months.

Build your savings and emergency fund

"If you have extra money sitting in your bank account, you should definitely check the interest rate," said Graff. Some traditional savings accounts haven't kept up with inflation, and you may be missing out on interest. 

Savings account annual percentage rates have increased significantly this year, with many topping 5% APY. But savings and CD rates will soon reach a plateau. While some banks may raise rates slightly in the coming days, experts don't expect rates to go much higher. So, if you've been waiting to lock in a long-term CD, the time to act is now. 

"Interest rates on [some] certificates of deposit, for example, are the highest they have been in more than 15 years," said Wu. 

Still, that doesn't mean you should move all your money out of a savings account.

Even if rates begin to dip, building up your emergency fund is crucial. Right now, you can earn a good return on your money, but even after rates drop, we recommend keeping emergency savings somewhere accessible, like a high-yield savings account. Over time, you may not earn the best rate if banks don't raise APYs as aggressively as last year. You'll have access to the money when needed, and you can continue making regular contributions. 

The most important advice is to shop around and compare rates before opening a new bank account. "Rates on CDs, in particular, can vary widely," said Wu. 

How much you need in your emergency fund is unique to your situation, though many experts recommend between three and 12 months of expenses. Start saving what you can now -- the money can come in handy if you suffer from a job loss or unexpected costs as the economic downturn continues.