How the Fed’s rate hikes slow the economy — and impact you (2023)


By Rachel Siegel


Emily Wright

Updated Nov. 2 at 2:02 p.m.Originally published Oct. 31, 2022

The economy runs like a machine. Right now, it’s overheating: Inflation levels are at the highest in decades, with prices climbing on everything from groceries to cars to rent. And the job market is unsustainably tight, with nearly twice as many open jobs as people looking for work.

Normally, the financial system, consumer spending and business activity keep the hardware running. But at times, those cogs cause glitches or kick into overdrive, and the sprawling apparatus needs to be slowed down.

Enter the Federal Reserve, which has been aggressively raising interest rates — the central bank’s one major tool to lower inflation, curb demand for goods and services and slow the economy. We won’t know until later if the Fed has been successful — or if it’s forced the economic machine to slow down too much, causing a recession.

The Feds policy rate

The first move happens when the Fed raises its policy rate, known as the federal funds rate. This is the overnight rate banks charge each other to borrow or lend. When the economy could use some extra juice, the Fed lowers rates. To pump the brakes, the Fed raises rates.

The Fed has hiked rates six times since March, including this week by 0.75 percentage points. One more hike is planned before the end of the year, and the central bank has pledged to keep rates high until inflation is back down to normal levels.

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(Video) How the Fed Steers Interest Rates to Guide the Entire Economy | WSJ

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The financial system

The financial system includes everything from the stock market to the banking sector to the wonky, technical products that make up the plumbing of the global economy. Changes in the federal funds rate influence those markets in the United States and abroad.

Bond traders, Wall Street bankers and market analysts all try to anticipate the Fed’s next moves. That amplifies the effect of interest rate increases and the central bank’s public messaging. Analysts might scrutinize Fed speeches in hopes of gleaning any hints on the exact size of the next interest rate hike, so the markets can start pricing in those moves ahead of time. The value of some financial instruments is also influenced by changes in the Fed’s overnight rate.

Stocks and bonds

Central bankers aren’t specifically aiming to cool stock prices or asset valuations. But their decisions still sway the stock market.

When rates go up, it becomes more expensive for businesses to borrow money. That can hurt future growth and weigh on a company’s stock performance. If enough companies see their stock prices go down, the whole market can sink. And as rates go up, risky stocks can seem less attractive because investors can make more money in safer assets than they can with low interest rates.

Meanwhile, bonds and interest rates have an inverse relationship. If interest rates go up, bond prices fall, and vice versa. Many bonds pay a fixed interest rate that’s more desirable if interest rates are going down, since demand for bonds usually rises then, along with their price.

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Market conditions

Fed officials often say “tighter financial conditions” aimed at slowing down the economy are among the intended goals of interest rate hikes. That extends to credit spreads, equity prices and the strength of the U.S. dollar, all of which respond to higher interest rates.

But tighter financial conditions can also create spillovers elsewhere. As other countries combat inflation, their currencies may be weaker compared to the dollar, which makes that fight harder.

Your 401(k)

If higher interest rates drive stock prices down, that can crunch your retirement savings and other investments, though money market and bank savings accounts will probably earn more than they did before.

If a recession happens, it won’t last forever. Experts say that even in times of economic stress, people shouldn’t try to time the market or drain their investments. But your retirement account could take a hit while the Fed’s actions take effect.

(Video) Lynchburg economics professor explains how the Fed interest rate hike could impact you

Everyday consumers

Interest rate hikes affect a range of consumer loans that, in turn, influence consumer behavior.

The Fed can only target demand in the economy; the central bank can’t address supply-side issues. Higher rates might discourage people from taking out a mortgage or getting a new auto loan, but Fed officials can’t build apartments or boost production of cars.

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Auto loans

For much of the pandemic, there’s been a shortage of new and used cars. Factories around the world have been hammered by chip shortages that limit the number of models available on the showroom floor. But demand has stayed high, with more people shopping for vehicles despite higher prices or longer wait times.

The Fed can’t fix holes in supply chains, but it can make auto loans more expensive — so fewer people will buy cars until supply chains catch up.

Mortgage rates

The housing market boomed during the pandemic, when the Fed’s rates were near zero and people clamored for new homes. Now, the Fed is trying to cool buyer demand to get prices back under control.

The Fed’s rate hikes are quickly absorbed into the housing market because they send mortgage rates way up. In late March, the average rate for a 30-year fixed mortgage, the most popular home loan in the United States, was below 4 percent. In late October, it topped 7 percent.

And already, buyers are bowing out of the market, more homes are available for sale and prices are starting to ease. But the higher loan rates mean many people — especially first-time buyers who don’t have equity to tap for purchases — still can’t afford to buy homes, further crowding the rental market.

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(Video) How interest rate hikes impact bonds and stock prices


Everyday purchases

If house payments or auto loans get more expensive as borrowing costs go up, people might cut spending elsewhere.

They might eat out less at their favorite restaurant, put off home renovations or skip a vacation. Those decisions amount to lower consumer demand, with repercussions for the broader economy. That restaurant might cut its hours. That contractor might not have enough cash for new equipment. That hotel might downsize staff.

Business and industry

Growing a company requires investment, whether hiring new staff, adding a new location or finding new ways to advertise a brand. But when investment costs go up, growth slows down.

Some pockets of the economy are already feeling a slowdown, even though the labor market overall and corporate earnings remain solid. Mortgage lenders, including at major banks, have let go of employees as demand for new loans slows. Job cuts are sweeping through Silicon Valley. Businesses that are attached to the housing market or tourism may be wary of expanding until they have a better sense of where the economy is headed — and if a recession is around the corner.

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Investing to grow

The exact interest rate a business pays to borrow from a bank will depend on the type of loan, the company’s financial history and its relationship with a lender. But regardless of the specifics, higher interest rates from the Fed make borrowing costlier.

A farm may decide against buying new equipment. A start-up may institute a hiring freeze. Businesses may be discouraged from putting more money into investments until they know how they will fare if job growth stalls, consumer spending falls or the economy officially enters a recession.

Corporate profits

Higher interest rates make a lot of routine business more expensive for firms that rely on lines of credit or loans. Raising capital also becomes harder when interest rates go up. That can hold back expectations for earnings and future growth, or make investors lose confidence that a company can weather economic stress.

Slimmer profit margins — or no profits at all — might push a company to reevaluate its budget, possibly minimizing staff, cutting back on inventory or shuttering whole departments. It might have no choice but to offset tighter margins by raising prices or eliminating bonuses or salary bumps.

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(Video) How The Federal Reserve’s Interest Rate Hike Could Impact Your Wallet


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As interest rates climb, more businesses might see a drop-off in demand, or run out of ways to offset their own rising prices, and they may have no choice but to slow hiring. Already, job postings are falling, and big-name tech companies such as Meta, Intel and Google have implemented temporary hiring freezes for certain roles.

Fed officials have warned that their inflation fight will cause economic pain. That toll could start to show up in the labor market. Projections released by the Fed in September show that officials think the unemployment rate could rise to 4.4 percent next year, up from the current level of 3.5 percent. Generally, a rise of half a percentage point or more in the unemployment rate has been a sign of a recession.

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Zoom out, and you’ll see how the Fed aims to slow down the economy from top to bottom.

It could be months before it’s clear how the Fed’s moves have affected the economy. By then, though, it could be too late: A growing number of economists warn that the Fed risks overcorrecting, and that its rate hikes are quickly outrunning its ability to see how its policies will work.

But for now, the Fed isn’t letting up. What happens next — for every single cog of the economy’s grand machine — remains to be seen.

About this story

Illustration by Kathleen Fu for The Washington Post.

(Video) How The Fed Rate Hike Affects The Stock Market | CNBC

Editing by Karly Domb Sadof, Mike Madden and Virginia Singarayar. Copy editing by Angela Mecca. Design and development by Emily Wright.


How does the Fed rate hike affect me? ›

Credit Card Interest Becomes More Expensive

A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money. The banks pass on these higher borrowing costs by raising the rates they charge for consumer loans.

How does raising interest slow the economy? ›

Cons. Another potential result of higher interest rates: Businesses may pull back on borrowing and investing, which means consumers and businesses would start spending less and eventually bring demand back down to a level that's commensurate with supply.

How does federal funds rate affect the economy? ›

What Happens When the Fed Raises Rates? When the Fed raises the federal funds target rate, the goal is to increase the cost of credit throughout the economy. Higher interest rates make loans more expensive for both businesses and consumers, and everyone ends up spending more on interest payments.

How does Fed rate increase slow inflation? ›

The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.

What are the disadvantages of high interest rates? ›

With higher interest rates, interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and spending. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall.

How do rising interest rates affect me? ›

Rising interest rates typically make all debt more expensive, while also creating higher income for savers. Stocks, bonds and real estate may also decrease in value with higher rates. You can take defensive action to help prepare for bad economical times while growing your overall finances.

Will higher interest rates hurt the economy? ›

It Could Trigger a Recession and a Rise in Unemployment

If the Fed raises rates too high and too quickly, it could cool demand so much that the economy tips into a recession. Higher interest rates make debt costlier and borrowing harder — for both consumers and businesses.

Do high interest rates cause recession? ›

Economists generally believe that the interest rate hikes of 2022 will eventually lead to a recession and a return to cheaper borrowing rates.

How do you benefit from rising interest rates? ›

Take advantage of rising interest rates by maximizing your savings, investing in bonds and refinancing high-interest debt before rates go higher. Oct. 3, 2022, at 9:59 a.m. The Federal Reserve raised interest rates in September for the fifth time this year in an effort to cool rising inflation.

What assets do well with rising interest rates? ›

Generally, longer-maturity bonds come with a longer duration, meaning that they'll decline more in value in response to hikes in interest rates. Shorter-term bonds will tend to hold up better during rising rate regimes. One investment everyone would be wise to consider, at least according to Suze Orman: series I bonds.

What happens to real estate when interest rates rise? ›

As mortgage rates rise, the effect on real estate investing can be positive. The market for rental properties will increase because fewer people can qualify for mortgages. That said, rising interest rates reduce prices, so it can sometimes be better to buy during a rising interest rate environment.

What does it mean when Fed hikes rates? ›

Rising interest rates won't impact existing federal loans, which have fixed interest rates, but could make future student loans more expensive. If you have fixed-rate private loans, those rates won't change either, but the rate on variable-rate loans will very likely rise.

What does the Federal Reserve do to slow down the economy? ›

Market conditions

Fed officials often say “tighter financial conditions” aimed at slowing down the economy are among the intended goals of interest rate hikes. That extends to credit spreads, equity prices and the strength of the U.S. dollar, all of which respond to higher interest rates.

What can FED do to slow or stop inflation? ›

How does the Fed lower inflation? The Fed's top tool for controlling inflation is its power to affect interest rates. The Fed can raise or lower its benchmark rate — known as the federal funds rate — based on what it is seeing in the economy.

What is the best way to slow down inflation? ›

Contractionary monetary policy is now a more popular method of controlling inflation. The goal of a contractionary policy is to reduce the money supply within an economy by increasing interest rates. 5 This helps slow economic growth by making credit more expensive, which reduces consumer and business spending.

Who benefits from inflation? ›

1. Collectors. Historically, collectibles like fine art, wine, or baseball cards can benefit from inflationary periods as the dollar loses purchasing power. During high inflation, investors often turn to hard assets that are more likely to retain their value through market volatility.

Is it better to buy a house when interest rates are high? ›

Rising interest rates affect home affordability for buyers by increasing the monthly mortgage payment. Despite how it seems, there are benefits to buying when interest rates rise. Less buyer competition forces home sales prices down, opens up more choices for buyers and can reduce buyer risk.

Will raising interest rates stop inflation? ›

Even so, interest rate hikes are known as the central bank's one major tool to lower inflation, which it does by raising the cost of borrowing money to curb the demand for goods and services.

How do you survive rising interest rates? ›

You can deal with a rise by using these tips: reduce expenses so you have more money to pay down your debt. pay down the debt with the highest interest rate first to pay less interest over the term of your loan. consolidate high interest debts, such as credit cards, into a loan with a lower interest rate.

Who benefits and who is hurt when interest rates rise? ›

Who benefits and who is hurt when interest rates​ rise? Corporations with immediate capital construction needs are worse off. Households with little debt, saving a significant fraction of annual income for retirement, are better off. The federal government running persistent budget deficit is worse off.

What are the pros and cons of rising interest rates? ›

One of the biggest “pros” to higher interest rates are the higher savings returns that can be earned in a savings account. Conversely, when interest rates are rising, business and consumers cut back on spending as increases in prices on goods resulting in lower consumption.

Are we in a recession 2022? ›

According to the NBER's definition of recession—a significant decline in economic activity that is spread across the economy and that lasts more than a few months—we were not in a recession in the summer of 2022.

What is the #1 cause of recession? ›

When demand peaks and starts to decline, the excessive supply of goods and services that aren't consumed can lead to a recession, with companies producing less and downsizing while people lose purchasing power and consumption continues to fall.

Where is your money safest during a recession? ›

One of the safest places you can put your money during a recession is in Treasury bonds. Treasury and savings bonds are issued by the U.S. government and are backed by the full faith and credit of the U.S. government. That means they're about as safe as investments come.

Where should I invest if inflation is high? ›

Here are some of the best TIPS and commodities funds for high inflation:
  • Vanguard Short-Term Inflation-Protected Securities Index VTAPX.
  • Vanguard Short-Term Inflation-Protected Securities ETF VTIP.
  • Schwab U.S. TIPS ETF SCHP.
  • Pimco Commodity Real Return Strategy PCRAX.
10 Nov 2022

What stocks go up when interest rates go up? ›

Historical outperformers:
  • Communication Services, Health Care, and Utilities sectors tend to see a boost as heightened volatility drives investors toward stabler options. ...
  • Energy stocks are supported by higher oil prices—which help drive up inflation, a key factor in the Fed's interest rate policy.
10 Jun 2022

What is the safest investment right now? ›

Here are the best low-risk investments in December 2022:
  • High-yield savings accounts.
  • Series I savings bonds.
  • Short-term certificates of deposit.
  • Money market funds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
1 Dec 2022

Where should I keep my savings? ›

The best places to save money and earn interest include high-yield savings accounts, interest-bearing checking accounts, money market accounts, certificates of deposit (CDs), and Treasury savings bond accounts.

Will interest rates cause a house price crash? ›

The bottom line. The housing industry makes up a large part of the U.S. economy. With interest rates rising, you can expect home prices to cool off and drop. The impact this will have on industries connected to the housing market varies.

How do you make money from inflation? ›

Less expensive tangible assets that do well during inflation include many types of commodities. Agricultural commodities like wheat, corn, soybeans, livestock and timber are among such commodities. Industrial metals like nickel, copper and steel also tend to do well during inflation.

Will 2023 be a good time to buy a house? ›

Mortgage rates are sky-high, inventory is low, and prices are still elevated from their pandemic spikes—making it a less than ideal time to buy. “Homebuyers and renters hoping for some financial relief in 2023 will likely be disappointed,” writes Clare Trapasso for

Do Fed rate hikes take effect immediately? ›

Consumers can almost immediately feel the Fed's impact. When the Fed's rate rises, so too do rates on credit cards, home equity lines of credit (HELOCs), auto loans and adjustable-rate mortgages (ARM), as well as yields on certificates of deposit (CDs) and savings accounts.

How does the Federal Reserve affect US citizens? ›

The Fed's decisions influence where banks and other lenders set interest rates. Higher Fed interest rates translate to more expensive borrowing costs to finance everything from a car and a home to your purchases on a credit card.

How does the Federal Reserve affect your life? ›

If inflation is kept to a minimum by the Fed's benchmark interest rate, prices for things you buy every day—think groceries or personal care items—have less room to increase. If a Fed rate change keeps those everyday prices low, you can put more of your money toward savings or paying off high-interest debt.

What is causing inflation 2022? ›

BLS data showed that inflation eased on July to 8.5% from the 40 year peak reached on June at 9.1%. Annual inflation increased to 8.3% in August 2022, in part due to rising grocery prices. In September the Fed increased the interest for a fifth time in the year reaching a 14 year high.

How do you survive inflation 2022? ›

There are many ways to increase your income during inflation. You can invest smartly in your employer-sponsored retirement plan, in fixed rate bonds, find ways to increase your active income, earn from passive income sources or investments, or invest in entities and commodities that rise with inflation.

What are 3 things that the Fed can do to combat inflation? ›

The Fed has several tools it traditionally uses to tame inflation. It usually uses open market operations (OMO), the federal funds rate, and the discount rate in tandem.

Why is inflation bad for the economy? ›

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

What should you not do during inflation? ›

While the effects of inflation are not easily avoided, several financial planners tell Fortune that there are steps consumers can take to duck the worst effects.
  • Avoid buying a car if you possibly can. ...
  • Grow investments, rather than savings accounts. ...
  • Think about buying more veggies. ...
  • Spend less, if you can.
13 Dec 2021

How do I shield myself from inflation? ›

Look for savings

Eliminate any fees you pay for credit cards or bank accounts (late fees, monthly or annual service fees, ATM fees, etc.). Many banks are waiving such fees and credit cards often have fee-free options. Renegotiate bills like cable, streaming or cell phone for any possible savings.

What can you buy before inflation gets worse? ›

Commodities like gold, oil, and even soybeans should increase in price along with the finished products that are made with them. Inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS), tend to increase their returns with inflationary pressures.

Who does the Fed rate hike affect? ›

1. The Fed's decisions influence where banks and other lenders set interest rates. Higher Fed interest rates translate to more expensive borrowing costs to finance everything from a car and a home to your purchases on a credit card.

How do I take advantage of Fed rate hike? ›

Action items when interest rates are rising: Shop for a higher-yielding online savings account to take advantage of higher rates. Pay down your credit card debt; consider a balance transfer credit card. If you're shopping for a home, make sure your mortgage preapproval reflects current interest rates.

Is a Fed rate hike a good thing? ›

When interest rates rise, it's usually good news for banking sector profits since they can earn more money on the dollars that they loan out. But for the rest of the global business sector, a rate hike carves into profitability. That's because the cost of capital required to expand goes higher.

How do rate hikes affect market? ›

In most cases, higher interest rates mean a stock market that declines in value. This is because when interest rates rise, companies will borrow less money. The result is their earnings will grow at a slower rate than investors anticipate. This has a ripple effect across all sectors of the stock market.

What do federal rate hikes do? ›

The Fed raises interest rates to slow the amount of money circulating through the economy and drive down aggregate demand. With higher interest rates, there will be lower demand for goods and services, and the prices for those goods and services should fall.

What does raising interest rates do to inflation? ›

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said in a recent speech.

Who benefits from rising interest rates? ›

Financial services, which can include banks, insurance firms and brokerage companies, is one of the key industries that benefits from a sharp rise in interest rates. For example, profit margins can increase during this time, especially with banks. With higher rates, banks can charge higher rates on consumer loans.

What assets do well when interest rates rise? ›

Generally, longer-maturity bonds come with a longer duration, meaning that they'll decline more in value in response to hikes in interest rates. Shorter-term bonds will tend to hold up better during rising rate regimes. One investment everyone would be wise to consider, at least according to Suze Orman: series I bonds.

Who will benefit when interest rates rise? ›

Some sectors within the stock market are more sensitive to changes in interest rates compared to others. Financials benefit from higher rates through increased profit margins. Brokerages often see an uptick in trading activity when the economy improves and in higher interest income from higher interest rates.

Where does money go when Fed raises rates? ›

  • Invest in Banks and Brokerage Firms. Banks and brokerage firms earn money from interest. ...
  • Invest in Cash-Rich Companies. ...
  • Lock in Low Rates. ...
  • Buy With Financing. ...
  • Invest in Technology, Health Care. ...
  • Embrace Short-Term or Floating Rate Bonds. ...
  • Invest in Payroll Processing Companies. ...
  • Sell Assets.

Can rate hikes cause a recession? ›

Once the economy starts to recover a central bank may partially or fully reverse those policies to stem inflation. Economists generally believe that the interest rate hikes of 2022 will eventually lead to a recession and a return to cheaper borrowing rates.


1. Fed rate hike aims to slow rising inflation
(PIX11 News)
2. Will the Fed signal a slower pace of interest rate hikes? | ABC News | The Business
(ABC News (Australia))
3. Fed’s Powell announces steps to slow rate hikes in fear of ‘overtightening’
(Yahoo Finance)
4. Federal Reserve's Barkin Urges Slowing Rate Hikes But Higher Destination
(Bloomberg Markets and Finance)
5. Interest Rate Hike: Why The Federal Reserve Is Increasing The Rate To Fight Inflation | Forbes
6. Australia's economy slows after eight interest rate hikes | The Business | ABC News
(ABC News (Australia))
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