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It really boils down to one key measure. 

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Since the second half of 2021, consumers have been forced to cope with sky-high living costs. Inflation has made everything from food to housing to utilities more expensive. And until inflation starts to cool in a meaningful way, a lot of people could end up depleting their savings or racking up scores of debt on their credit cards just to cover their essential bills.

The Federal Reserve has been eager to address the problem of inflation. To this end, the central bank has already implemented several aggressive interest rate hikes that have made borrowing more expensive for consumers on a whole.

Now to be clear, the Fed isn’t tasked with directly setting borrowing rates, so the rate you get on a mortgage, auto loan, or personal loan isn’t being dictated by the Fed directly. Rather, the Federal Reserve oversees the federal funds rate, which is what banks charge one another for short-term borrowing purposes.

But when that rate goes up, it tends to drive up the cost of consumer borrowing as a whole. So now, consumers are spending more money than usual not just on living costs, but also, on interest for common loan products and credit cards alike.

Clearly, this is putting a financial strain on a lot of people. But will things get better from a rate hike perspective in 2023? Or will the Fed keep up its aggressive rate hikes?

It’s a matter of how inflation trends

The reason the Federal Reserve has been raising interest rates is to encourage a pullback in consumer spending. Inflation has been so rampant because there’s been more demand for consumer goods than available supply. Once that gap is narrowed, inflation levels should start to come down.

As such, whether the Fed continues with interest rate hikes in the new year will really depend on how inflation levels trend. Thankfully, over the past few months, the rate of inflation has slowly but steadily been dropping. If that pattern continues, consumers could get relief as the Fed slows down its rate hikes.

In fact, the Fed has already pledged to slow down those hikes as early as late 2022. So the pace of rate hikes could slow even more as 2023 rolls along. And if inflation levels continue to drop, the Fed may decide at some point not to raise the federal funds rate at all. But we’d need to see a pretty drastic drop in inflation for that to happen.

We’ll have to just wait and see

It’s too soon to predict what interest rate hikes will look like in 2023 — and just how expensive it will be for consumers to borrow money in different forms. But right now, borrowing rates are already up. So those looking to take out loans should prepare to proceed with caution in the new year and keep their balances to a minimum.

The same holds true for credit cards. Those tend to charge even more interest than most loan products, so consumers should make every effort to keep those balances down.

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