What's next for U.S. interest rates?

The Fed announced in February it was raising its benchmark short-term interest rate a quarter percentage point, bringing the policy rate to a range of between 4.5 to 4.75 percent. The hike was less aggressive than the half- and three-quarter point increases of 2022, and left many believing that the Federal Reserve was easing up a bit.

But recent economic reports suggest that inflation, as well as hiring and spending, were "hotter in January" than anticipated, The Wall Street Journal reports. As a result, Federal Reserve Chair Jerome Powell Powell indicated in his semiannual appearance before Congress that further interest rate hikes were likely in the near future. "The ultimate level of interest rates is likely to be higher than previously anticipated," he said. 

But with the sudden collapse Silicon Valley Bank still making waves in the banking system, things are far from certain. 

What will the Fed do next?

Powell didn't specify how steep rate hikes may be — in fact, he emphasized that "no decision has been made on this." But after his remarks, markets began to expect "a half-point increase in March and the peak, or terminal rate, to hit close to 5.75 [percent] before the Fed is finished," CNBC reports. Some investors "​​even penciled in a small chance that they could go above 6.25 percent," The New York Times reports.

Then, the implosion of Silicon Valley Bank triggered a "sudden eruption of financial strains at U.S. regional banks," Bloomberg said, and the sentiment moved yet again. Investors are "ripping up their forecasts," the Financial Times reported.  

The Fed is now expected to either stick with a quarter-point hike, or keep rates unchanged "to steady the global financial system," FT said. "Even before the problems flared up in the banking sector, we thought a 50 basis-point move would be ill-advised, and we still think that is the case," Michael Feroli, chief US economist at JPMorgan Chase & Co. told Bloomberg. 

The rate "may peak at about 5.1 percent in six months from now," Bloomberg added, with some traders betting the Fed will actually cut rates in the second half of 2023. 

When is the next interest rate decision?

The moment of truth will come when the central bank meets March 21-22. 

In the meantime, Powell said the Fed will be awaiting the data revealed in the jobs and inflation reports, which he indicated would be key to the Fed's decisions. "If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes," Powell said before Congress.

How do interest rates affect the economy?

The Fed uses interest rates "like a gas pedal and a brake pedal," Forbes explained. Lowering rates stimulates the economy; raising rates slows the economy down. The agency doesn't actually set the funds rate — banks do that — but "the Fed assumes that banks will use it as a floor in their own lending," Forbes added. 

Rate changes usually take "at least 12 months" to have "widespread economic impact," Investopedia explained. But the stock market reacts immediately. Powell's initial remarks indicating steeper rate hikes sent the markets into a bit of a tailspin. The major indexes each fell more than 1 percent. Beyond stocks selling off, "Treasury yields rose and the dollar extended again after Powell's comments," Reuters reported.

The SVB news threw everything up in the air. Bank stocks fell, and government bond prices rose "as fund managers ramped up bets" that rates wouldn't change, the FT said. Analysts think policymakers "need to tread carefully" from here in their efforts to "hose down inflation," the paper added. Some economists blamed the Fed's "most aggressive rate-rising cycle in decades" for SVB's collapse. "The Fed is starting to break things," John Briggs, the global head of economics and markets strategy at NatWest, told The Guardian.

Others suggest that the economy isn't as sensitive to rate hikes as it once was. "Today's economy is no longer as interest-rate sensitive as that of past decades, and its resilience, while a virtue, does complicate matters for the Fed," Rick Rieder, BlackRock Inc.'s chief investment officer of global fixed income, told the Journal.

What do rate hikes mean for your wallet?

As Kiplinger puts it, "rate hikes are a blessing and a curse for consumers." When the Fed raises rates, consumers will pay higher interest rates on debt like credit cards, home equity lines of credit, and private student loans. However, on the flipside, savings rates also tend to increase. In the face of rate hikes, Kiplinger offers the following pieces of advice:

• Pay off any debt. Aim to pay off your debt before interest rates get any higher. While the impact might feel gradual initially, continued increases ultimately can make paying off debt more challenging.
• Lock in rates if you can. For those with a home equity line of credit, consider locking in a lower rate on all of a portion of your balance.
• Take advantage of top savings rates. Finally, take advantage of increasing savings rates. Kiplinger advises consumers that they'll usually find the best rates at online banks or other online financial institutions.

Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com

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