How the Federal Interest Rate Changes May Impact You

The Federal Reserve announced a 0.25 percentage point increase in interest rates on Wednesday, pushing them above near-zero levels for the first time in two years. Analysts have been expecting this rate increase, but questions remain about how much further the Fed will raise interest rates in the coming year.

Consumers should be aware of how these interest rate policy decisions may impact personal and household finances.

Why Is the Fed Raising Interest Rates?

The Federal Reserve is raising interest rates largely because inflation is reaching levels the economy hasn’t experienced in 40 years. In February, consumer prices climbed to a 7.9% annual rate. The last time inflation increased at that rate was in January 1982.

This rate hike aims to increase the cost of credit in the economy and bring inflation under control. Essentially this means that the Fed is trying to make borrowing more expensive, which will cause businesses and consumers to cut back spending. Theoretically, with less spending in the economy, prices will start to come down and bring inflation closer to the 2% target rate.

Despite the rate increase, the federal funds rate is still near historic lows; the move alone won’t curb inflation immediately. More significantly, the move provides the financial markets a signal that the Fed is combating inflation, which could tighten lending standards preemptively.

How High Will Interest Rates Go?

The Federal Reserve is expected to raise rates further through the year to tamp down inflation. However, it is unclear how high the Fed is willing to push rates in this complicated economic environment. The central bankers want to rein in rising prices, but they do not want to act too aggressively and cause the economy to contract.

Policymakers are also keeping an eye on the war between Russia and Ukraine while making these interest rate decisions. The economic fallout of the conflict could change the calculus for officials. Inflation is expected to spike higher with rising energy and food costs, but that does not necessarily mean more aggressive rate increases will follow. That’s because there is a possibility of a weakening of the global economy, in which case the Fed will want to avoid tightening monetary policy too much.

How Will This Affect Loan and Credit Card Interest Rates?

Changes in the federal funds rate indirectly affect various financial areas throughout the economy, including loan and credit card interest rates.

As mentioned above, an increase in the federal funds rate will likely lead to higher interest rates on personal loans, mortgages, and credit cards. Higher interest rates mean costlier financing for borrowers.

Recommended: How Do Credit Card Payments Work?

Is Now a Good Time to Refinance Existing Loans?

Since the Fed is in the process of raising interest rates, many borrowers may wonder whether now is a good time to refinance existing loans before rates go any higher. The answer depends on individual financial circumstances.

Borrowers with a variable interest rate loan could look to refinance to a fixed-rate loan to lock in a lower interest rate before they rise further.

Additionally, individuals who have high credit card debt may be wary of a future with increasing interest rates. To remedy this, a debt consolidation loan could be used to lock in low fixed rates now and streamline the repayment process.

However, just because the Fed is raising rates doesn’t mean that other interest rates will also rise. The federal funds rate is just a benchmark, and other factors are at play regarding borrowing rates. So while it may look like an ideal time to refinance or consolidate loans to capture low interest rates now, it does not necessarily mean that will be ideal for your specific financial situation.

What Other Impacts Will the Fed’s Rate Hike Have on My Finances?

On a more positive note, the Fed’s rate hike and the expected future increases could lead to more attractive interest rates for various types of savings accounts and certificates of deposit.

The average rate paid on savings accounts is currently just 0.06%. This figure could trend higher as the Fed moves its benchmark rate. Similarly, certificates of deposit (CDs) could see an increase in rates because of the Fed’s moves. When the Fed raises rates, it leads banks to increase interest rates on savings accounts and CDs to entice depositors to put more cash into the bank.

However, changes in interest rates for savings accounts and CDs won’t be immediate; it generally takes months for banks to increase rates on these instruments. Analysts note that banks are currently flush with cash, so they may not be quick to raise interest rates on savings vehicles to attract more deposits. Nonetheless, if you have a savings account or are looking to invest in a CD, you may be able to take advantage of higher yields in the coming year.

The Takeaway

It may be daunting to hear that policymakers are raising interest rates. After all, won’t that make borrowing more expensive? But rising rates may bring inflation under control, which would be a boon to consumers’ wallets.

A rising interest rate environment could also benefit household finances for those with cash in savings accounts as noted above. However, it will likely be a while before consumers see the benefits of rising rates on savings accounts at most banks.

Fortunately, SoFi® Checking and Savings is an online bank account that offers a 1.00% APY, much higher than the current national average. You can earn this competitive interest rate, save, and spend–all in one account by signing up. And, you’ll pay zero account fees to do it.

Learn more about how SoFi® Checking and Savings can help you reach your saving goals.
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