What Americans face now as the Fed raises interest rates

The US Federal Reserve's big interest rate hike on Wednesday -- and the expectation of more to come -- is aimed at bringing down 40-year high inflation topping 8% on an annual basis in recent months.

But the largest rate increase in a quarter-century won't deliver immediate inflation relief. It will take time for higher borrowing costs to ease price pressures.

That could mean more pain for Americans already digging into their wallets to pay more for gas, groceries, and everything else.

"It's going to be an uncomfortable period where inflation is running high and borrowing costs are also going to rise," says Oxford Economics' Kathy Bostjancic.

Here's what the Fed's rate hikes means for consumers:

WILL THIS MAKE IT MORE EXPENSIVE TO BUY A HOME?

One of the sectors the Fed has been watching closely is the interest rate-sensitive housing market, where prices have risen 38% since the start of the pandemic. The surge has been driven by low borrowing costs, put in place by the Fed to cushion the economy from the COVID-19 pandemic, meeting an upswell in demand and an ongoing shortage of properties for sale.

Mortgage rates have already risen sharply since the Fed began signaling late last year it would likely tighten policy, with the average contract rate on a 30-year fixed-rate mortgage reaching 5.65% last week, the highest level since late 2008, the Mortgage Bankers Association reported earlier on Wednesday. 

"Mortgage rates are definitely going to go up over the next few weeks," said Matthew Pointon, senior property economist at Capital Economics, with daily mortgage data showing the average 30-year fixed rate now around 6.28% and possibly going above 6.5% over the next few weeks.

Worse is set to come, Pointon says, with mortgage rates probably not peaking until the middle of next year.

WHAT ABOUT MY RETIREMENT FUND?

Stocks plummeted in the days leading up to Wednesday's rate hike as investors worried that sharply tighter monetary policy would drive the US economy into recession, if not this year then next.

What happens to stocks in coming weeks and months will depend a lot on whether investors believe the Fed will be successful in reining in inflation without cratering growth. A good read on that may require another several month of inflation and other data, says State Street's Marvin Loh.

"I think that uncertainty out there with regard to higher energy costs, with regard to higher food costs, and a lot of the other undertones within the economy ... creates an environment where you're still going to have volatility."

WILL THIS BRING DOWN THE COST OF MY GAS AND GROCERIES?

In short, no. That's one of the difficulties the Fed is facing. By raising rates, it can cool demand in the economy by making borrowing costs more expensive, nudging consumers and businesses to curb spending. But it can't do anything about supply shocks.

The spike in global food prices is mostly due to the impact of Russia's invasion of Ukraine, two grain-exporting powerhouses that accounted for 24% of global wheat exports by trade value, 57% of sunflower seed oil exports and 14% of corn from 2016 to 2020, according to data from UN Comtrade.

Likewise, oil prices after US-led sanctions took Russian energy supplies off the global market.

WILL MY AUTO PAYMENT AND CREDIT CARD COSTS GO UP?

If you've got outstanding loans without fixed interest rates, the answer is a simple yes. Though the Fed doesn't control what banks or car dealers charge for such loans, credit card rates and auto loans typically rise when the Fed's policy rate does.

Household debt has been rising rapidly, with consumer credit up more than 8% in the first quarter to $1.5 trillion, a recent Fed survey showed.

COULD THE FED RAISING RATES AFFECT MY JOB?

By raising rates high enough to decisively dent inflation, the Fed will at the very least spark a period of slower economic growth. But investors are skeptical that the Fed can achieve its aims without inducing a recession, often defined as two consecutive quarters of negative growth.

Fed policymakers think they may yet be able to avoid a big spike in companies laying off workers. That's because the thinking goes, the unemployment rate is currently 3.6%, low by historical standards, and there are almost two job vacancies for every worker, so firms could conceivably cut back on job openings without cutting actual jobs.

But Fed Chair Jerome Powell acknowledged on Wednesday that the task is getting harder. If the Fed can get inflation down near its 2% goal while keeping the unemployment rate to the central bank's median forecast of 4.1% in 2024 "that would be a successful outcome," Powell said.

Many, however, worry. "If our monetary policy brings about a slowdown of the economy, we're all going to pay the price," Lindsay Owens, executive director of progressive advocacy group Groundwork Collaborative, told activists gathered this week across the street from where Fed policymakers were meeting in Washington.