Federal Reserve Hikes Interest Rate, Boosting Borrowing Costs and Inflation Pressure

The Federal Reserve raised its benchmark interest rate for the first time in three years, increasing borrowing costs across the economy. The federal funds rate has been increased by a quarter of a percentage point to bring the target range to 3.75% to 4%. This move is expected to affect people taking out new loans, including auto loans and personal loans.

According to Brad Hershbein, a senior economist at the Upjohn Institute, those taking out new loans will feel the effects most directly. He explained that a $30,000 five-year loan at 5% interest would have a monthly payment of about $566, but at 8%, the payment would increase to around $608, resulting in roughly $2,500 more in interest over the five years.

Hershbein noted that as interest rates remain elevated, they can further affect borrowing costs. He also pointed out that wages are another factor for households, as pay has not been keeping pace with inflation. The Fed's latest projections put the median federal funds rate at about 4.1% by the end of the year.