What is an interest rate hike?

IN RECENT years, interest rates have continued to climb, causing financial stress for millions of Americans.

On March 20, 2023, it was reported that the Federal Reserve is expected to hike rates once again, and now many want to know what this means.

The Federal Reserve raised the federal funds rate seven times in 2022


The Federal Reserve raised the federal funds rate seven times in 2022Credit: Getty

What is an interest rate hike?

In 2022, the Federal Reserve increased interest rates seven times and they have since continued this trend into 2023.

The rate that they change is known as the federal funds rate, which “determines how much interest financial institutions charge one another to borrow money overnight,” according to NerdWallet.

When this happens, consumers often see an increase in the interest paid on things like credit cards, loans, and mortgages.

Interest rate hikes are often good news for savers as they receive more interest on their money but bad news for borrowers who then have to pay more interest, Nerd Wallet notes.

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The Fed often reduces rates in an attempt to stimulate the economy and increases them to try to combat inflation, which has increased in recent years due to the Covid-19 pandemic and Russia’s invasion of Ukraine among other things.

What is the Federal Reserve?

In the United States, central banking is controlled by the Federal Reserve System.

The Fed, which was created on December 23, 1913, is responsible for setting interest rates, managing the money supply, and regulating the financial markets, according to the Council on Foreign Relationships.

The Fed is operated by a Board of Governors who are nominated by the President and later confirmed by the Senate.

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As of 2023, the committee members include:

  • Chairman Jerome H. Powell
  • Vice Chairman John C. Williams
  • Michael S. Barr
  • Michelle W. Bowman
  • Lisa D. Cook
  • Austan D. Goolsbee
  • Patrick Harker
  • Philip N. Jefferson
  • Neel Kashkari
  • Lorie K. Logan
  • Christopher J. Waller
The continued interest hikes have caused financial hardship for millions of Americans


The continued interest hikes have caused financial hardship for millions of AmericansCredit: Getty

When will interest rates go down?

Americans have been waiting for interest rates to go down since the start of the Covid-19 pandemic, but according to money experts, relief should not be expected until 2024.

The Fed is expected to pause rate hikes by summer 2023, but the cuts will not begin until the end of the year, according to Morning Star.

Morning Star’s prediction is that the federal funds rate of 4.75% will fall to the Fed’s 2% target by the end of 2024.

At this time, the Fed’s exact timeline is unclear.

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