Interest rate hike 2022: Fed could raise rates by .75% on Wednesday, Wall Street says

Earlier this year, the Federal Reserve turned to its most potent weapon — raising interest rates — to combat soaring inflation. But with consumer prices having only accelerated since then, Wall Street analysts say consumers and investors should gird for an even bigger hike this week as central bankers try to tame the nation’s fiercest bout with inflation in 40 years

The Fed, which will announce its decision on Wednesday at 2 p.m. Eastern time, could lift rates by 0.75%, according to analysts at TD Macro. That would come after announcements of a 0.25% hike in March and a 0.5% move in May — with the latter marking the sharpest increase since 2000.

If the Fed decides on a three-quarter point boost, it would be the first rate hike of that size since 1994. Analysts at Deutsche Bank said in a report on Tuesday that they expect 0.75% hikes at the central bank’s meetings both this week and in July, underscoring what they called a “need for speed” in clamping down on inflation.  

Indeed, speed is of the essence in confronting inflation, economists say. The Consumer Price Index, a broad basket of goods and services used to track inflation, surged 8.6% in May, from an 8.3% annual rate in April. Gasoline prices have continued to hit new highs almost daily amid depleted domestic production and Russia’s war in Ukraine, while food and housing costs are also surging. 

With more inflation data under its belt, the Fed is likely to ratchet its rate hikes higher, some analysts say.  

“We believe this shows the Fed is more determined to do what it takes to end the inflation overshoot as rapidly as possible even if that raises the chance of a hard landing in 2023,” TD Macro said in the report. 

El-Erian says inflation could hit 9%


To be sure, some Wall Street analysts continue to expect a more modest interest-rate hike increase on Wednesday, but others are tweaking their economic forecasts to factor in sharper monetary tightening. By year-end, the federal funds rate — the rate that determines borrowing between banks — could be almost twice as high as its pre-pandemic level of about 2%, according to forecasts.

“It was just a few weeks ago that investors were forecasting the funds rate to be ~2.58% at the end of this year, but that number is now more than 100 [basis points] higher at 3.7%,” analyst Adam Crisafulli of Vital Knowledge told clients in a research note. “And the ‘terminal’ funds rate (the level at which the Fed will stop hiking this cycle) is now seen north of 4%.”

Here’s what the Fed jacking up interest rates could mean for your wallet.

What will the rate hike cost you?

Every 0.25% increase in the Fed’s benchmark interest rate translates to an extra $25 a year in interest on $10,000 in debt. So a 0.75% increase would mean an extra $75 of interest for every $10,000 in debt.  

Economists expect the Fed will continue to raise rates throughout the year as it battles inflation. Some analysts now forecast the central bank will announce another 0.75% increase in July, followed by two 0.5% hikes in September and November. 

By early 2023, the federal funds rate could be 3.75% to 4%, according to TD Macro. That implies a rate increase of at least 2.75% higher than the current federal funds rate of 1%. For consumers, that means they could pay an additional $275 in interest for every $10,000 in debt. 

How could it impact the stock market?

The stock market has slumped this year amid various headwinds, including the impact of high inflation and the Fed’s monetary tightening. But a bigger-than-expected interest rate increase on Wednesday “could be welcomed by stocks,” Crisafulli said. 

“It would represent a powerful signal by [Fed Chair Jerome Powell], help the Fed recapture control of the policy narrative and clamp down on the massive change in tightening forecasts,” he noted. 

Credit cards, home equity lines of credit

Credit card debt will become more expensive, with higher APRs hitting borrowers within one or two billing cycles after the Fed’s announcement, according to LendingTree credit expert Matt Schulz. For instance, after the Fed’s March hike, interest rates for credit cards increased for three-quarters of the 200 cards that Schulz reviews every month.

Consumers with balances may want to consider a 0% balance transfer credit card or a low-interest personal loan, Schulz said. Consumers can also ask their credit card companies for a lower rate, which research has shown is frequently successful.

Credit with adjustable rates may also see an impact, including home equity lines of credit and adjustable-rate mortgages, which are based on the prime rate. 

What’s the impact on mortgage rates?

Mortgage rates have already surged in response to the Fed’s rate increases this year. The average 30-year mortgage stood at 5.23% on June 9, according to Freddie Mac. That’s up from 2.96% a year earlier. 

That is adding thousands to the annual cost of buying a property. For instance, a purchaser buying a $250,000 home with a 30-year fixed loan would pay about $3,600 more per year compared with what they would have paid a year earlier. 

But the Fed’s next rate hike might already be baked into current mortgage rates, said Jacob Channel, senior economic analyst for LendingTree, in an email.

“The Fed’s rate hike may not mean that mortgage rates are going to significantly increase,” he noted. 

The housing market reflects one part of the economy where the Fed’s rate increases are slowing demand. Channel added: “These high rates have significantly dampened borrower desire to refinance current loans, and they’re also showing signs of reducing demand for purchase mortgages as well.”

Savings accounts, CDs

When it comes to higher interest rates, the bright side for consumers is better yields from savings accounts and certificates of deposit. 

“Online deposit rate gains have accelerated after the last two Fed rate hikes. Further acceleration is expected” with additional hikes, said Ken Tumin of in an email. 

In May, the typical online savings account yield increased from 0.54% to 0.73%, while average yields on one-year online CDs rose from 1.70% to 2.53%, he noted.

That’s better than savers used to earn, but it’s still far below the rate of inflation. That means that savers are essentially eroding the value of their money by socking it into a savings account while inflation is running above 8%. 

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