Why the Fed's Latest Rate Hike Is Bad News for Americans

The Federal Reserve has raised interest rates during its last 10 consecutive meetings. On May 3, it hiked up interest rates by 0.25%, which was the third rate hike of that nature since the start of 2023.

The reason the Fed has been raising interest rates is that it wants to bring inflation levels down. The last Consumer Price Index had annual inflation measured at 5%. The Fed, meanwhile, has pledged to keep raising interest rates to bring inflation down to the 2% mark. So the most recent rate hike on the part of the Fed will likely not be the last one we see in 2023.

Unfortunately, though, interest rate hikes have the potential to hurt consumers looking to borrow money. And it could also bring us even closer to a broad economic decline.

Prepare for borrowing costs to rise even more

It's a big misconception that the Fed is tasked with setting consumer interest rates, like those charged for products like auto and personal loans. Rather, the Fed oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But an increase in the federal funds rate tends to trickle down to consumer borrowing rates, resulting in higher costs.

In light of the latest rate hike, consumers are now looking at more expensive interest rates pretty much no matter how they borrow and what they're borrowing for. And some consumers with existing debt could see their payments rise.

While debts like personal loans and home equity loans tend to come with fixed interest rates, credit card and HELOC (home equity line of credit) interest tends to be variable. This means that consumers carrying these types of debt could see their costs rise in the near term.

A recession could ensue

Another problem with the latest Fed rate hike? It could drive the economy closer to recession territory.

As it is, the Fed is already anticipating a 2023 recession, albeit a mild one. But if it becomes prohibitively expensive for consumers to borrow money, they're not going to. And if consumer spending declines quickly and drastically, it could set the stage for a prolonged economic downturn. That means millions of Americans could find themselves getting laid off through no fault of their own.

The one silver lining

While the Fed's latest interest rate hike isn't good news, one benefit is that it could result in higher interest rates for savings account holders. And CD rates could rise as well. So all told, consumers with money in the bank might benefit. But consumers in the opposite boat -- those who don't have money and need to borrow it -- may be in for a world of struggle.

While it may be possible for some consumers to hold off on borrowing until costs come down, that's not always feasible. Someone who needs to buy a car to function, for example, may not have the luxury of waiting another year or two in the hopes that financing one will be more affordable.

And the worst part? The Fed might not be done raising interest rates, so consumer borrowing costs could get even more burdensome as 2023 moves along.

Normally, borrowers are advised to work on boosting their credit scores to snag more affordable rates on the loans they take out. That's still applicable advice. But it may not have as much of an impact at a time when loan rates are high -- and climbing -- across the board.