The Fed's Ninth Straight Rate Hike Comes After Banking Chaos. Experts Unpack What's Next

With inflation lingering and the cost of borrowing increasing, here's what you can expect.

Fed Chairman Jerome Powell in front of an American flag at a press briefing
US Federal Reserve Chair Jerome Powell is still trying to rein in inflation.
Drew Angerer/Getty Images

This story is part of Recession Help Desk, CNET's coverage of how to make smart money moves in an uncertain economy.

The Federal Reserve raised interest rates for the ninth time on March 22, hiking rates by 0.25% and bringing the federal funds rate range to 4.75% - 5%. The increase pushes the rate to the highest it's been since May 2006, according to the Federal Reserve.

It's a game-changing move that may indicate that past rate hikes are working, but the job of lowering inflation isn't done. In fact, the economic downturn may just be getting started.

Even though inflation is slowing down, Fed Chairman Jerome Powell indicated that work still needs to be done to stabilize prices. Despite the recent bank failures of Silicon Valley Bank and Signature Bank, the fight to lower inflation continues -- but less aggressively than before. 

"Inflation remains too high and the labor market continues to be very tight, said Powell in a March 22 press conference. "Reducing inflation is likely to require a period of below-trend growth and some softening in labor market conditions."

Over the last year, the Federal Reserve has been working to temper rising prices. From groceries to gas, inflation has been squeezing Americans over the last 12 months. In response, the Fed has aggressively raised interest rates, its top tactic to try to lower rising prices. 

With inflation finally showing signs of cooling, the Fed is raising rates less aggressively. That said, Powell indicated that the bank isn't done hiking rates and will continue to do so appropriately. Below, experts weigh in on inflation predictions, recent bank failures and what the latest rate hike means for your money. 

What's going on with inflation?

Last year, inflation remained high, soaring to record-breaking levels in June, when it hit a 9.1% yearly increase. Now, inflation sits 6% higher than last year, according to the Bureau of Labor Statistics. High inflation levels have stemmed primarily from an increase in gas, food and housing prices. While the pace of inflation is slowing, prices are still rising across the board, particularly for groceries and housing.

During periods of high inflation, your dollar has less purchasing power, making everything you buy more expensive -- even though you're likely not getting paid more. In fact, more Americans are living paycheck to paycheck, and wages aren't keeping up with inflation rates. 

What higher interest rates mean for the economy 

Smaller rate hikes don't mean that the economic downturn is almost over. Experts predict 2023 will be another rough year, as prices remain high and interest rates push up the cost of borrowing.

"Even with the goal of directing the CPI (consumer price index) back to 2%, the aggressive rate hikes in 2022 and early 2023 now are showing its wrath," said Shannon Grey, certified financial planner and founder of InvestmentEdge Planning. Last year, Powell said the economy would feel some pain with future rate hikes, and we're seeing some of the effects with recent bank failures, Grey adds. 

"We are clearly not out of the woods," said Grey. 

Many experts still worry that further increases in the cost of borrowing money could contract the economy too much, sending us into a recession: a shrinking, rather than growing, economy. The Fed acknowledges the adverse effects and potential risks of this restrictive monetary policy. And at this point, a recession seems more likely,

"I see the likelihood of a recession at 70% right now," said Derek Delaney, certified financial planner and founder of PharmD Financial Planning. If unemployment rises and employment is no longer stable, a recession could come sooner -- but what happens next with inflation will play a key role in the likelihood and magnitude of a recession.

"Time will tell if it is a minor one or a more intense one," said Kimberly Howard, a certified financial planner and founder of KJH Financial Services. If prices continue to go up, consumer spending is expected to slow.

How the recent bank failures may impact future rate hikes

The Federal Reserve is still digesting recent bank failures and is carefully weighing future decisions in regards to rates, said Bobbi Rebell, a certified financial planner and author of Launching Financial Grownups. But as of now, the banking system isn't directly impacting the Federal Reserve's decision to raise rates, said Rebell. However, the Fed is keeping a close eye on the situation.

"We will continue to monitor conditions in the banking system and are prepared to use all of our tools, as needed, to keep it safe and sound," said Powell.

With bank failures in the news, you may be wondering if your money is safe in a savings account, certificate of deposit or other bank account. The answer is yes, said Rebell, as long as it's FDIC insured. 

What the latest rate hike means for your wallet 

The most recent Fed rate hike means that borrowers will continue to see higher interest rates on mortgages, credit cards and personal loans. On the flipside, as interest rates remain high, savers can benefit from boosted earnings on their balances. But it's worth noting that the rate of inflation is outpacing savings rates -- so you can't "beat" inflation.

High prices combined with high-priced debts have experts and consumers alike still concerned about the future of the job market and the possibility of a recession. Fortunately, there are steps you can take to prepare your wallet for the economic uncertainty ahead: 

Tackle new and outstanding debt 

Raising interest rates, even by a little, means buying a car or a home is more expensive, since you'll pay more in interest. Higher rates could make it more expensive to refinance your mortgage or student loans. Moreover, the Fed hikes will drive up interest rates on credit cards, meaning that your debt on outstanding balances will go up.

Before taking on a new loan or mortgage, make sure you understand exactly what you'll owe: the payment schedule, potential fees and interest rate. For any outstanding debt, make a debt payoff plan to knock down balances as quickly as you can.

"Look at the numbers and make deliberate choices," said Rebell. "And also communicate with your family, because very few of us operate in an economy of one." Now's the time to consider paying off outstanding debt with a lower or fixed interest rate, if possible, she said. You may also consider a balance transfer card -- as long as you have a plan to pay the balance before interest accrues -- or a debt consolidation loan.

Be sure to check whether your debt carries a fixed or variable interest rate. Many personal and mortgage loans have fixed rates, so if you borrowed recently, you might have a high-interest rate that'll carry through the lifetime of the loan. Most credit cards, on the other hand, have a variable interest rate -- meaning the already very high APR (averaging over 20% right now) on any balances will only grow as rates rise. 

"If the Fed were to slow down or stop raising rates, that doesn't necessarily mean your rate is going down. It just might mean that it's not going up," said Rebell. Don't wait to take action. If you need to move debt to a fixed-rate loan, it's better to move now in case rates increase even more in the coming months. 

Build your savings and emergency fund

Savings account rates have increased by a lot this year, making it prime time to secure your emergency fund or start saving for other short-term goals. 

Make sure the money is in a high-yield savings account for easy access to your money in case you need it while earning a competitive interest rate -- some accounts today earn over 5.00% APY. As federal rates slow, you may not see APY increases as high as last year. "Consumer's should not expect to see material increases to their savings rates unless the Fed increases rates by another [50 basis points]," said Delaney. Instead, rates will remain the same or won't increase as much until the Fed starts to lower rates. For now, it's best to take advantage of the higher APYs most online banks are offering.

That being said, if your emergency fund isn't fully stocked (at least three to six months of expenses), start saving what you can as a financial safety net. The money can come in handy if you suffer from a job loss or unexpected costs as the economic downturn continues. 

The bottom line

We don't know when the economic downturn will stop or what to expect from a possible recession, but now is the time to prepare. 

Start by looking at your budget to cut unnecessary spending or consider a side hustle to bring in extra income. Aside from building up your savings, pay close attention to interest rates on outstanding loans or new debt you may take on this year. Even though interest rates may not drastically change in the coming months, rates still remain high and can offset other financial goals if you're paying more in interest.