What does the Federal Reserve rate hike mean for you and your money?

There is no doubt that the current economy is struggling to keep up with inflation. To fight inflation and control the money circulating in the economy, the Federal Reserve sometimes raises interest rates. This is often referred to as a ‘rate hike.’

A rate hike means that banks will charge more for loans and that investors can get higher returns on their investments. So it has a direct impact on your finances as most people take loans to purchase property or other big-ticket items.

Let’s find out how a rate hike affects your money and how you can prepare for it.

Why is the Federal Reserve raising the interest rates?

To understand why, we need to first understand how interest rates affect the economy. When interest rates are low, it becomes cheaper for people to borrow money. This can stimulate spending and investment, which can boost economic growth. However, low interest rates can also lead to inflation, as there is more money circulating in the economy. Inflation, in turn, can lead to a decrease in the value of a currency, as the purchasing power of that currency decreases.

During and after the pandemic, the inflation rate started to increase rapidly. People lost their jobs and had to cut down on their expenses. To help citizens out, the Fed decided to reduce the interest rates so that business owners and families can borrow at a lower rate.

But now, the economy is improving and people are getting back to work. This means that prices of goods and services will start increasing again and if the interest rates remain low, it will lead to even higher inflation – which is already high.

Over the last 12 months, the inflation rate spiked to a 40-year high and then slowly started to decline. To control this situation, the Fed decided to increase a quarter percentage point (0.25) in the interest rates.

Since the interest is high now, people will borrow less money and keep more money in the banks. This means that there will be less money in circulation which will make the prices of goods and services go down. This way, the inflation rate can stay at a healthy level.

Overall, raising interest rates is a way for the Federal Reserve to control inflation and keep it at an acceptable rate. This helps us maintain our purchasing power and ensure that people are not overspending.

How will it impact your money?

As we mentioned earlier, a rate hike has a direct impact on your finances. This is because when the interest rates increase, it becomes more expensive to borrow money. So things like car loans, mortgages, and credit cards will become more costly.

Let’s take a look at a few ways it might impact your money:

1. Credit cards

If you are using credit cards, you are borrowing money and paying an interest rate on it. With higher rates, your credit card debt becomes more expensive to pay off. This means you will have to pay more money in interest, which can add up quickly.

2. Loans and mortgages

Similarly, if you are taking out a loan or mortgage, the higher rates mean that you will also be paying additional interest.

This could make it difficult for you to pay your monthly repayments. It can put a dent in your overall budget and make it harder for you to save money.

3. Savings

On the flip side, if you have any savings in your account, a rate hike could benefit you. This is because your bank will be offering higher interest rates on deposits which means that your money can grow faster in the long run. 

So if you have extra cash lying around, it is a good idea to put it in the bank and get some return on investment.

4. Auto loans

If you are planning to take out an auto loan, the higher rate could make it more expensive – so it is important to shop around and get the best deal possible. Or you can wait til the rates come down again and take advantage of the lower interest rates.

5. Student loans

Student loan rates are also impacted by the rate hikes. The interest rate will be higher if you take out a student loan so it is important to make sure that you understand all the terms and conditions before signing up for one.

What to do when the interest rate rises?

Even though a rate hike might have an impact on your finances, there are still steps that you can take to minimize the damage.

1. Lock your mortgage rate

If you are planning to take out a mortgage, one of the best things you can do is to lock in your rate as soon as possible. This means that you will be able to get the current low-interest rate and not have to worry about it going up in the future.

2. Take advantage of the higher savings rates

As mentioned earlier, banks will be offering higher interest rates on deposits. If you have extra money lying around, it is a good idea to put it in an account and get some return on investment. This will help you maximize your savings and make the most out of the rate hike.

3. Review your credit card debt

If you are carrying a balance on your credit cards, it is important to review all the terms and conditions and make sure that you understand all the fees associated with them.

This will help you get a better idea of how much you are paying in interest and how long it will take to pay off your debt. Also, using cash or debit cards instead of credit can help you avoid taking on additional debt.

4. Refinance your auto loan

If you have taken out an auto loan, it might be a good idea to refinance it if the interest rates go up. This will help you get a lower rate and save some money in the long run. If you want to buy a new car, it is important to always shop around and get the best deal possible.

5. Pay off your debts ASAP

The rise in interest rates means – you will be paying more money in interest. So it is important to make sure that you pay off your debts as soon as possible.

Create a budget that allows you to put more money towards paying off your debts so that you can save money in the long run.

Debt consolidation could also be an option if you have multiple debts. This will help you get a lower interest rate and make it easier to manage your finances.

Conclusion

The Federal Reserve is the central bank of the United States, responsible for regulating the country’s monetary policy. One of the key tools the Fed uses to manage the economy is adjusting interest rates, specifically the federal funds rate, which is the interest rate that banks charge each other for overnight loans. When the Fed raises interest rates, it can have a significant impact on the value of the US dollar.

Interest rate hikes are not an uncommon phenomenon – it’s the way the Fed controls the economy. While it may have an impact on your finances, there are still steps that you can take to minimize any damage. Plan ahead and make sure that you understand all the terms and conditions associated with any loans or investments so that you can make the most of them. Good luck!