Everything You Need To Know About How the Fed Rate Will Impact Your Personal Finances
The Fed raised rates another 75 basis points on July 27. The news, while not surprising, comes after Treasury Secretary Janet Yellen told Meet the Press, that inflation is too high but assured Americans that “this is not an economy that’s in recession.”
So what does the increase mean to your personal bottom line?
As interest rates rise, the cost of borrowing money — everything from home loans to credit cards — will go up.
How will the sting affect your household finances?
It will touch a number of areas, some harder than others, but it may not be immediate. Now is a good time to begin to reevaluate your household budget and look for areas you may be able to reduce spending so you can try to pay down credit card debt or reduce your reliance on credit cards if you’ve been using them to make ends meet.
Here are a few areas where some, but not all, Americans may feel the pinch.
Mortgage Loans and Re-fis
Unless you have an adjustable rate mortgage or plan to buy a home soon, the interest rate hike should not affect your current fixed rate mortgage. Eventually, mortgage interest rates for new mortgages and ARMs will rise. If you’re planning to refinance, now may be a good time while interest rates are still low and home prices are high.
If you’re planning to buy a home, the news isn’t as bleak as it may seem. As interest rates rise, home prices may begin to fall. So, your monthly mortgage payment for any given house you choose to purchase could be the same, but your interest payment will make up more of it.
There’s more good news, too. Keith Gumbinger, vice president at HSH.com, told The New York Times, “[R]ates could rise considerably from present levels and still be considered low by historical standards.”
Credit card companies must give consumers 45 days’ notice before raising rates or increasing fees, so you have time to prepare for higher monthly payments. In that time, consider shopping around for a balance transfer card with a 0% intro APR to start making a dent in that revolving debt.
Experts say that higher interest rates tend to take “one or two statement cycles” to be reflected on bills, according to The New York Times.
Federal student loans have a fixed interest rate, so current borrowers don’t have to worry about a rate hike. In the future, according to the New York Times, new borrowers could pay 1.5% to 1.9% more to borrow money for college.
As with fixed-rate mortgages and student loans, if you’re paying off a current car loan you don’t have to worry about your monthly payments increasing. If you’re buying a new or used car and applying for a loan, however, you can expect to pay more to borrow money.
When you couple higher interest rates for auto loans with rising prices at the pump and the increased costs of buying either a new or used car and driving becomes an expensive proposition.
Yields on savings accounts, certificates of deposit, and money market mutual funds are all expected to rise in coming months, but the increases may be small. The national average for savings account interest rates in June 2022, according to GOBankingRates.com, is just 0.07%.
Money market account yields may rise faster, according to The New York Times, but they rarely deliver the best return on your investment.
Stocks and Bonds
With Wall Street already in a bear market, the affect of the interest rate hike on stocks could be small. The New York Times noted that any market reaction this week to the FOMC decision to raise interest rates is a “short-term blip.”
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Bonds may also fall as interest rates rise. But if you own bonds as part of mutual fund investments, the funds will reinvest the money to rebalance your portfolio, eventually resulting in higher yields.
“You have to absorb those price losses in the near term, but over the long run you could end up with higher returns,” Andrew Patterson, senior international economist at Vanguard, told The New York Times.
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