Updated July 27, 2022 at 2:03 PM ET
Another month, another Federal Reserve interest rate hike.
On Wednesday, the Fed raised its benchmark interest rate by 0.75%, the second hike of this magnitude in just two months by the U.S. central bank in its quest to rein in the record inflation that has sent prices soaring for everything from gas and groceries to clothes and housing.
But what do the Federal Reserve's interest rate hikes actually mean for hundreds of millions of Americans – Americans who have jobs, who buy things, who have bank accounts?
In short, interest rates are the Fed's main tool to combat inflation. Inflation is driven by strong consumer demand. By raising interest rates, which makes things more expensive, the central bank is hoping to dampen Americans' willingness to spend money.
"It is essential that we bring inflation down to our 2% goal if we are to have a sustained period of strong labor market conditions that benefit all," said Federal Reserve chairman Jerome Powell at a press conference Wednesday.
And the Fed will continue to raise rates as needed throughout the year if inflation doesn't abate, Powell says. The Fed will meet several more times this year; the next meeting is in September.
"The Federal Reserve got inflation wrong. And now they're trying to correct their mistake by pretty quickly hiking interest rates. And that will slow the economy," Aaron Klein, a senior fellow at the Brookings Institution, told NPR before another recent rate hike.
Generally speaking, as the Federal Reserve raises its benchmark interest rate, everything else in the economy that involves interest rates of some kind is affected – and that's most things: credit cards, student loans, home and car loans, banking, savings accounts, the everyday operations of businesses, you name it.
That means the stakes are high when the Fed raises rates, as it did on Wednesday.
Losers: People trying to buy a home right now
The Fed's interest rate isn't directly tied to mortgage rates. But mortgage lenders move their rates up and down based in part on what they expect the Fed to do.
With inflation so bad right now, mortgage rates rose throughout the spring and have stayed high into the summer.
Since June, the average 30-year rate has hovered above 5.5%, according to Mortgage News Daily. Earlier this year, a 30-year fixed-rate mortgage could be had for around 3.25%.
Given a loan of $400,000, the increase in interest rates has turned a monthly mortgage payment of about $1,700 into one approaching $2,300 in the span of just a few months.
That sudden increase in monthly payment cost has started to cool the country's historically hot housing market. Last year, buyers routinely paid tens of thousands of dollars over asking price and waived contingencies to stand out in a pile of other offers on a home that had been listed only a day or two.
Now, homes are starting to sit on the market longer, and more sellers are cutting prices to find buyers. Builders started fewer homes in June than they did in May.
"These numbers are all going to get worse before they get better. It's going to be ugly during the transition, but I think what we'll end up with is a market which is more healthy because it is not healthy to have a housing market where home prices are rising 20% per year or more," Ian Shepherdson, the founder and chief economist at Pantheon Macroeconomics, told NPR.
That rapid increase in cost already has priced some potential homebuyers out of the market. Mortgage applications are down to their lowest level since 2000, according to the Mortgage Bankers Association.
(Mortgage rates have historically been higher, especially in the 1980s, when rates topped 15% as part of the Fed's efforts to fight the inflation of the 1970s. But home prices now are higher than ever, having risen dramatically in many areas over the past two years.)
Economists have mixed outlooks on what all this means for the housing market. Some say that home prices will hold steady; others are forecasting a drop in prices.
At the Fed's meeting in June, Powell suggested that prospective homebuyers wait to see if prices stabilize.
"I would say, if you're a homebuyer, a young person looking to buy a home: You need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again and mortgage rates are low again," he said.
Winners: People who have money in savings accounts
This one is modest, but noteworthy. With interest rates so low for the past few years, banks had little reason or wiggle room to offer any meaningful interest rates on personal savings accounts, where you might keep money for your emergency fund or a down payment savings.
Ever since the pandemic began and the Fed dropped interest rates, the average interest rate for a typical savings account hovered around 0.06%, according to the FDIC.
Now, with the Fed's benchmark rate rising, interest rates are ticking up, too. Some banks, especially internet banks, are starting to offer interest rates on savings accounts of 1% or more.
It's important to know that the Fed rate isn't the only factor that banks take into account when setting interest rates. Banks also consider how much cash customers have deposited and how much competitors are offering. So don't expect to see rates rise by .75%.
And, of course, those interest rates remain lower than current inflation rates, meaning that the real value of those savings will still decrease over time.
But for people who need savings to be accessible without the risk of a stock market drop – like emergency funds or a down payment for a new home or car – 1% is better than nothing.
Other savings vehicles that offer a mix of accessibility and growth rate, like CDs and I Bonds, also are offering higher returns than in past years.
Losers, most likely: All of us, in the short term
At the heart of Wednesday's interest rate hike is a tightrope walk: The Fed is trying to slow inflation without triggering a recession and the layoffs that would come with it.
But even with the Fed's thumb on the scale, some of what's driving inflation is outside of officials' control. The war in Ukraine, for instance, has helped drive up oil and commodity prices, along with the ongoing supply chain disruptions caused by the pandemic.
As a result, inflation has stayed hot. And that's making the Fed's tightrope walk more difficult.
"I think that what's becoming more clear is that many factors that we don't control are going to play a very significant role in deciding whether that's possible or not," Powell said in June. "It's not going to be easy."
Economists have grown increasingly pessimistic about the Fed's ability to pull off the so-called "soft landing."
Several recent surveys of economists, including those by Bloomberg and by Bankrate, have put the odds of a recession in the next year at a coin toss. Large financial institutions like Wells Fargo and Bank of America have grown increasingly pessimistic in their recent economic forecasts.
"It doesn't preoccupy me, but I think the chance of a recession some time in the next 24 months is high," Goldman Sachs CEO David Solomon said in an interview this month with NPR.
That means the U.S. could see widespread layoffs – even as inflation is still high, and Americans are paying higher prices for things like food and gas.
Winners, hopefully: All of us, in the long term
The Fed's goal with the interest rate hikes, today and down the road, is to reach more equilibrium in the economy — meaning an inflation rate closer to 2%, and unemployment around 4%. (Even though that could mean higher unemployment than the current rate of 3.6%, Powell has said he would "certainly look at that as a successful outcome.")
If they're able to achieve that, that means they were successful at their goal of a soft landing — or a "soft-ish landing," as Powell put it in May.
While economists are starting to feel pessimistic about the odds of avoiding a recession, it's still possible. Americans just have to be patient while things play out, they say.
"Monetary policy takes time to act. There's a long lag between when the Fed moves this week, when it moved before and when that trickles through the economy," said Klein of the Brookings Institution. "It can take up to a year before the full effect of a Federal Reserve interest rate hike is felt on the real economy."
But if the Fed sticks the landing — or if some of the other issues driving inflation, like supply chain disruptions, are resolved — inflation could get back to normal, alongside a healthy labor market with wages and consumer demand in balance.
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