The same Federal Reserve that rushed to cut interest rates amid the coronavirus pandemic is now staging the most aggressive race to raise borrowing costs in four decades.

The U.S. central bank, at its November meeting, raised interest rates by three quarters of a point for the fourth time this year, officially bringing the benchmark interest rate that influences almost all borrowing costs throughout the economy up to a target range of 3.75-4 percent — the highest since early 2008.

The Fed has now hiked rates at six straight meetings, something it hasn’t done since 2005. But when consumers take into account how much officials have hiked rates this year in total, it’s even more meaningful. Not since the 1980s has the Fed raised rates 3.75 percentage points in a single year.

The Fed likely isn’t done yet, though the destination is unclear. Fed Chair Jerome Powell signaled officials will likely take interest rates even higher than the 4.5-4.75 percent they initially projected in September, but might take smaller steps to get there. That could mean rate hikes worth a slower half a percentage point — and eventually a quarter point.

Policymakers are expected to stop raising interest rates altogether at some point in 2023, though they’ll likely stay at an elevated level for some time.

The implications for consumers are stark. While savers have been rewarded with one of the fastest increases to yields on record, banks have been lifting at a similarly breakneck pace how much they charge consumers to finance big-ticket purchases from cars and homes. That’s on top of growing damage that could be caused by higher interest rates, with economists in a Bankrate poll putting the odds of a recession by the end of 2023 at 65 percent.

“Not only is it a concern, but the odds favor it,” says Greg McBride, CFA, Bankrate chief financial analyst, referring to recession risks. “Look at the last three [tightening] cycles: Two of them ended in recessions, and the one that didn’t was an economic slowdown, where they had to reverse course and start cutting rates. History is not on their side.”

Fed’s rate moves depend on inflation and employment data

Where the Fed is heading — and where it’ll end up — depends on inflation and the labor market. Consumer prices have been soaring at the fastest rate in 40 years, while inflation showed troubling signs in August of broadening beyond expensive gas, energy and food prices.

What was once a story of supply shocks traceable to disruptions in global trade and the coronavirus pandemic is now partially linked with the job market, something even Fed Chair Jerome Powell has described as “tight to an unhealthy” degree on multiple occasions dating back to March of this year.

Job creation hasn’t meaningfully slowed and is outpacing population growth, according to experts. Between July and September, employers added an average of 372,000 new jobs, even faster than the prior three-month average of 348,000.

And even with 3 percentage points of tightening so far this year, employers have had a record number of job openings since February 2021, now up to almost two open positions for every unemployed worker. It signals strong demand for labor that isn’t matching up with supply.

Just 39 percent of workers in a Bankrate September poll reported not receiving a better-paying job nor a pay raise, down from 56 percent in 2021, 50 percent in 2019 and 62 percent in 2018.

But the survey also suggested a vicious inflationary cycle could be afoot. Half of the workers who received a raise or a better-paying job say the increase didn’t keep up with inflation, Bankrate’s poll also found. That could prompt more workers to start asking for even higher pay — potentially begetting even higher inflation if companies have to lift prices to cover it.

The job market, however, could start to take a turn. The Fed’s rates have officially risen beyond what’s called the “neutral rate of interest,” meaning each increase above that level starts to actively cool the economy rather than gradually take stimulus away from it.

The Fed so far has been racing to that threshold of neutral — believed to be around 2.5 percent — by “front-loading” increases. In other words, officials are being aggressive out of the gate and getting most of the tightening out of the way in 2022 in hopes of finding the flexibility to wait and see later on.

“An ounce of prevention is worth a pound of cure,” McBride says. If the Fed front-loads rate hikes, “they don’t have to continue to raise interest rates as long or raise them as high and flirt with a much more significant economic fallout.”

Yet, consumer prices have been more than three times higher than 2.5 percent since January, raising the risk that Fed officials have to take rates even higher — and also robbing it of any strategies to blunt the economic damage.

We’re not going to get back to 2 percent inflation with persistent supply chain disruptions and a war in Europe disrupting commodity markets. No amount of rate hikes is going to overcome either of those, so the hope is that while they’re raising rates, that issues on the supply side begin to abate as well.

— Greg McBride, CFA, Bankrate chief financial analyst

Making the picture even more complicated, higher interest rates take time to filter into the economy. Experts say it may take a year for the full effect of a rate hike to be realized, raising the risk that the Fed won’t know it’s done enough until it’s too late.

“If you’re balancing risks and you get less worried about the economy slowing and more worried about inflation just staying high and getting built in to the price and wage-setting process, then you might conclude you need to move faster,” says Bill English, a finance professor at the Yale School of Management, who spent 20 years at the Fed. “Lags just make the problem harder because you have to be forward-looking and judge where the economy is going to be.”

Markets fear that defeating inflation means starting a recession

Fears of a recession are far and wide right now. One such example: The 10-year Treasury yield has been trading below the 2-year rate since early July. This inversion of the yield curve has long been used as a Wall Street recession indicator.

When the yield curve inverts, it shows that investors are expecting a downturn — and it also makes the flow of credit more restrictive when long-term borrowing is cheaper than short-term rates.

Markets have also been uneasy so far in 2022, as investors wrestle with those building recession risks. The S&P 500 is down nearly 22 percent so far this year as of Nov. 2, while an index tracking market volatility out of the Chicago Board Options Exchange is up 55 percent so far this year.

Part of the anxiety about inflation all along has been that a downturn is its only cure, likely informed by markets’ bad experiences during the stagflationary-era of the 1970s and early 1980s.

Back then, the Fed manufactured what was, at the time, the worst recession since the Great Depression, hiking its benchmark borrowing rate all the way to a 15-20 percent target range. The idea that expansions don’t just die of old age has long been the lore on Wall Street.

What to do with your money when rates are expected to rise and recession risks are high

The highest rates in more than a decade also mean an end to the lowest borrowing rates in decades. Take steps now to prepare your finances for a new era of monetary policy, one that will mean more expensive borrowing costs down the road.

  • Pay down debt: Consumers with fixed-rate debt won’t feel any impact from a Fed rate hike, but you are more fragile if you have a variable-rate loan, especially if it’s a high-interest credit card. The average credit card rate hit 18.73 percent on Oct. 26, according to Bankrate data. Consider consolidating that debt with a balance transfer card to help you make a bigger dent on your principal balance. Homeowners with an adjustable-rate mortgage or a home equity line of credit (HELOC) might want to consider refinancing into a fixed-rate loan. “You don’t want to be a sitting duck for higher interest rates on your credit card or home equity line of credit,” McBride says.
  • Boost your emergency savings and find the best place for your cash: High inflation shouldn’t keep consumers from building up an emergency cushion of cash in case of emergencies or unplanned expenses. In fact, rising recession risks only underscore the urgency. Do, however, shop around for the best high-yield savings account on the market. Online banks tend to offer higher yields for your cash than traditional, brick-and-mortar institutions. If you put an initial $10,000 deposit into an account with a 2 percent annual percentage yield (APY), you’d earn $200 in interest, compared with just $16 on the average savings yield of 0.16 percent.
  • Think about recession-proofing your finances: Given that plenty of risks lie ahead for the Fed, always be on the lookout for ways that you can recession-proof your finances. Along with building up your emergency fund, experts say it comes down to living within your means, staying connected with your network, identifying your risk tolerance and staying focused on the long haul if you’re an investor.

“It’s going to be a very challenging task to land this plane perfectly on the tarmac,” says Ryan Sweet, senior director of economic research at Moody’s Analytics. “There’s going to be a lot of bumps, where the Fed has to back off on rate hikes or accelerate rate hikes. It’s very unlike the last tightening cycle.”