We’re back with another inflation update. Recently, the Federal Reserve opted to leave interest rates at 5.25 to 5.5%, ending weeks of speculation that the Fed would push rates higher. 

For now, the Fed is willing to take a cautious approach, but that doesn’t mean rate hikes are over or inflation is no longer a factor. Here’s what you need to know. 

Rate hikes and inflation in the last year  

First up, a quick recap. The Fed raised short-term interest rates 11 times between March 2022 and November 2023. Currently, interest rates sit at a 22-year high. 

All these rate hikes are the Fed’s attempt to slow inflation. Typically, the Fed targets a 2% inflation rate. In 2022, inflation started to spike. As we discussed in “How Does the Fed’s Interest Rate Hike Affect You?” the U.S. inflation rate hit 7.9% in February 2022. At the time, that was record-setting. But in June 2022, the inflation rate hit 9.1%. 

Today, there are signs that inflation is starting to cool. The U.S. Consumer Price Index for September put the inflation rate at 3.7%, still higher than the Fed’s 2% target, but far below the peaks seen in June. 

How inflation works 

So, how does inflation become a bit of a runaway train? Inflation is the rate at which the general level of prices for goods and services rises, eroding the purchasing power of a currency. It is a common economic phenomenon and can be caused by increased demand, production costs or monetary policy. 

Moderate inflation is generally considered normal and even desirable in a growing economy, as it encourages spending and investment. However, if inflation becomes too high or too low, it can create economic instability.

The Fed uses monetary policy tools to control inflation and stabilize the economy. One of the key tools at their disposal is the manipulation of interest rates.

When the Fed wants to control inflation, it typically raises interest rates which impacts consumers in two main ways: 

• Higher cost of borrowing: When the Fed raises interest rates, it becomes more expensive for banks to borrow money from the central bank. This increased cost is then passed on to consumers and businesses in the form of higher interest rates on loans, mortgages and credit cards.
• Reduced consumer spending: Higher interest rates mean higher monthly payments on variable-rate loans, which can reduce consumers' disposable income. When people must spend more on debt payments, they have less money to spend on goods and services, leading to decreased consumer spending.

The ongoing impact on consumers 

While there are signs that inflation is slowing, consumers are largely still feeling the pinch on their wallets.

On the one hand, many people are still spending. The economy grew 4.9% in the third quarter of 2023, according to the U.S. Department of Commerce.

But on the other hand, consumers are also feeling financial pressure from rising prices on practically everything from gasoline to food. With higher prices, income doesn’t stretch as far, and many people are cutting back or eliminating expenses to keep ahead. 

There’s also the issue of rising rates. The average rate for a 30-year mortgage currently sits at 7.79%, according to Freddie Mac. 

Looking ahead

Still, high interest rates aren’t entirely a bad thing. When the Fed raises rates, it also raises the rates on savings products like high-yield savings accounts. If you can put money aside, the money you save will likely work harder for you during times of inflation. 

Our MarketEdge Money Market Savings account can help you earn more on your savings with no minimum balance requirement or monthly fees. Our share certificates offer a fixed rate of return with a guaranteed rate locked in for three months to five years. Both options can help you take advantage of higher interest rates.