The Federal Reserve’s War on Inflation Affects Your Wallet

I’m about to get grim in this newsletter. 

But let’s face it: The economic situation is grim – not just in the U.S., but worldwide. Inflation is soaring in Europe, leading to a wave of protests and strikes and increased political turmoil. Inflation is still above 8% in the U.S., despite the Federal Reserve’s attempt to lower it with aggressive interest rate hikes this year. Most U.S. workers say their pay isn’t keeping up with inflation, and there’s a chance an unemployment wave is coming. 

I could go on. 

Whether or not we’re technically in a recession, a lot is riding on the Fed meeting this week. To slow down the economy, many analysts say the Fed is likely to raise interest rates by 0.75% for the fourth consecutive time, with interest rates heading to reach 5% by March 2023. 

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Economists are sounding the alarm about it, saying the cumulative effect of the Fed’s decisions could lead to a U.S. and global recession. And it has a bigger impact on your finances than you may realize. 

“The continued increase in rates absolutely has a ripple effect throughout our entire economy,” said CFP Sara Kalsman, an expert I spoke to in September about the Fed’s monetary policy. “This will directly affect consumers through higher credit card rates, higher interest on car and business loans, and eventually mortgages.” 

So, almost every aspect of your finances could be impacted by the Fed’s policy moves — from your savings and debt to your buying power and job security. Wild, right? 

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, borrowing harder, and saving more lucrative. Mortgage rates will likely stay high as long as the Fed’s rate remains high. 

Now’s the time to prepare for “R” word, regardless of how big it is or how long it lasts. Chip away at high-interest debt and avoid taking on more debt, save as much as possible, build up your professional network, and cut discretionary spending. 

The Bottom Line

Pay attention to the Fed’s moves. The world economic outlook could get even grimmer, underscoring the importance of saving for emergencies, paying down debt, and adjusting your budget.