A Fed Rate Hike Today May Reduce Inflation, But Bring Us Closer To A Recession

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What's Happening Today

How much further will the Federal Reserve go to slam the brakes on the economy and control inflation?

We could get a clearer idea this afternoon when the Federal Open Market Committee, the group that sets the central bank's benchmark fed funds rate, announces how much it will hike interest rates, a move that will increase borrowing costs on just about any loan you take out.

The Fed is widely expected to hike rates by 75 basis points, bringing the rate to a range of 3.75% to 4%, its highest since 2008, in its fourth unusually large rate hike this year.

Many consumer loans like credit card debt and car loans are indirectly determined by that rate. Many banks use the fed funds rate as a benchmark to set their own prime rates that they use to determine interest rates on loans. The fed funds rate also influences mortgage rates. That means it's likely going to get harder to borrow money to buy things, which is exactly what the Fed wants. The less people buy, the less demand there will be for goods and services, and—hopefully—companies won't be able to raise prices at the fast and furious pace they have been for the past year.

It could also make it harder for businesses to get money to invest and expand and hire workers, which means the more the Fed raises rates, the greater the likelihood the economy slows down so much it goes into a recession.

One area where the Fed's monetary tightening campaign has already taken a heavy toll is the housing market. While the average rate on a 30-year fixed-rate mortgage decreased slightly in the latest week for the first time in over two months at 7.06%, it was still close to its highest since 2002 according to the Mortgage Bankers Association. Those higher interest rates have stifled homebuying and refinancing. The volume of mortgage applications dropped 0.5% in its sixth consecutive week of declines.

- Diccon

Editors' Picks

Fed to Hike Big Again and Open Door to Downshift (Bloomberg)

Federal Reserve Dictionary: Your Guide to the Jargon (The Balance)

Mortgage demand drops for sixth week in a row, as rates remain above 7% (MarketWatch)

Biden Administration to Provide Over $13 Billion in Aid to Help American Families Lower Energy Bills (CNBC)

7 Tips for Saving for Retirement if You Started Late (The Balance)

Traditional vs. Roth IRAs: What's the Difference? (The Balance)

Money-Saving FAFSA Filing Tips (The Balance)

Term of the Day

Catch-Up Contributions

The Internal Revenue Service (IRS) offers retirement savers something known as a catch-up contribution. Whether you have saved diligently over your career or got a late start planning for retirement, you can take advantage of these contributions to add more to your tax-favored retirement plan. To qualify for catch-up contributions, you must be at least 50 before the end of the year.

The IRS imposes limits on how much you can contribute to most tax-favored retirement accounts each year. There are limits to catch-up contributions as well. If you have a traditional IRA you can contribute up to $6,000 to it in 2022 (this is unchanged from 2021). You can contribute the full $6,000 to a Roth IRA if you earn $129,000 or less per year in 2022 ($204,000 if married filing jointly). The $6,000 limit is across all IRA accounts you own, whether they're traditional or Roth IRAs. If you are age 50 or older, you can add catch-up contributions of $1,000 more, or up to $7,000 in total.

Off the Charts

Household budgets are being squeezed by prices that are rising faster than wages, and something's got to give. That something is savings, a chart of consumer income shows. Consumers only saved 3.1% of their after-tax income in September, the Bureau of Economic Analysis recently reported. Since this summer, Americans have been saving at rates similar to those that preceded the Great Recession.