Remember Rising Interest Rates? They’re Coming Back

Number of the Day: The most relevant or interesting figure in personal finance

4

That’s how few of the last 13 years the Federal Reserve’s benchmark interest rate has not been virtually zero—a stark reminder of how different borrowing costs may feel once the central bank starts raising it.

As the Federal Reserve this week reinforces expectations that it will begin raising its benchmark fed funds rate in March, perspective is helpful. So far, the Fed’s long-run projection is that the target for the fed funds rate will be 2.5% by 2025. Since it was over 6% as recently as the early 2000s, that’s certainly not a high rate environment, historically speaking. It translates to about an extra $10 on a monthly credit card balance of $5,000.

But what about what we’ve gotten used to as consumers and borrowers? Since the 2008 financial crisis, the first time the Fed ever cut its rate to nearly zero, the rate was only higher between December 2015 and March 2020–a period of just over four years. Then the COVID-19 pandemic hit and shut down large parts of the economy, pushing central bank officials to step in and lower it again to offer some relief. The fed funds rate influences the cost to borrow on a credit card, through a car loan, or in any number of other ways.

Now, Fed Chairman Jerome Powell said at a press conference Wednesday, it’s time to pull back that support to fight the more immediate threat of inflation

“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy we put in place to deal with the economic effects of the pandemic,” Powell said.

Have a question, comment, or story to share? You can reach Helen at hreis@thebalance.com.

Article Sources

  1. Federal Reserve. “Open Market Operations.”

  2. The Calculator. “Finance Charge Calculator.”