The Federal Reserve Has Officially Raised Interest Rates: What Does That Mean For You?
The news broke Wednesday that the Federal Reserve will be raising interest rates to combat inflation. The need for action is because the current inflation rate has increased to 7.5%, the highest recorded since 1982. This 40-year high is in light of the crisis in Ukraine, and we have seen changes all over the world, especially in high gas and oil prices after placing sanctions against Russia.
Why Are They Raising The Interest Rates?
Since inflation started increasing, prices like gas and everyday goods have risen. To revive the economy and slow down consumer demand, the Federal Reserve has raised the federal funds rate, which is the interest rate that banks charge each other to borrow money from one another overnight.
Due to the banks having higher interest rates, everyday consumers will feel the results as the increase trickles down the funnel. In March, at the height of the pandemic, the Fed lowered interest rates to almost zero to help citizens recover from the crumbling economy and overwhelming unemployment rate. As reported on Wednesday, the rates will increase to between .25 and .50.
Here are the mechanics behind the Fed’s logic:
- The banks will receive higher interest rates
- The banks will raise interest rates for consumers
- Consumer demand will slow down
- Inflation will come to a halt
What Do The Rate Hikes Mean For You?
These aren’t guaranteed, but projections indicate that institutions will increase home and consumer loans interest due to the rising federal fund rate. These possibilities could decrease your current home-buying budget or your chances of repaying your student loans anytime soon, along with other impacts.
Mortgage loans tend to follow the pattern of the federal fund, so when the federal fund rate increases, there’s a domino effect. If you’ve already signed a contract with a lender, they legally can’t raise your rate. You’re locked in, so you’re safe from the price hike. If you plan to shop for a house later this year, you may have to lower your spending budget as higher rates can potentially weaken your buying power.
The interest rate for a fixed 30-year mortgage is now at 3.85%, a pandemic high and a stark contrast from 3.05% in 2021. The increase didn’t happen all at once, and rates have been climbing in anticipation of the Federal Reserve’s decision and the future rate hikes they may implement.
The current mortgage rate is still low compared to history, but predictions point to mortgage rates continuing to climb throughout 2022.
Since March 2020, federal student loan payments have been paused with zero interest to help Americans recover from the devastation of the pandemic. In January, this pause would have ended, but President Biden has extended it until May 1. Due to the delay, federal student loan interest won’t increase with the federal fund rate.
Even after payments resume, most federal student loans have a fixed interest rate based on the date the loan was disbursed, and that interest rate can’t change after that. For example, the interest rate for Federal Direct Stafford Loans for graduate students remains at 5.28% for loans disbursed between July 1, 2021, and June 30, 2022. Any loans given to students during that period are attached to the initial fixed interest rate of 5.28%.
As for those with private student loans, your rate increase will depend on your chosen rate when you signed the contract. If you have a student loan with a fixed rate, you can rest easy because your interest won’t change. On the other hand, if you chose a variable interest rate private student loan, your interest is dependent on the market. Therefore, you can expect your rate to increase.
Savings Accounts and C.D.s
You might be in luck if you stashed away money in a savings account during the pandemic, but a potentially more attractive yield depends entirely on your type of account and your bank.
Suppose you opened a savings account with a big bank like Chase or Wells Fargo. In that case, you may receive an increased interest rate after a while or not at all because big banks don’t need your money when they already get many deposits daily. In contrast, small banks and institutions tend to pay their members better interest rates more quickly because they need more deposits following a federal fund rate increase.
As for Certificates of deposit, these accounts have already started seeing increases, with the average one-year C.D. at online banks being .67, a hike of .16 since January.
If you’re a business owner in any global sector aside from banking, the rate hike could mean less profit for you. When interest rates rise, the cost of capital goes up and business owners need capital to expand. Now, those expenses must come from other sources.
It’s uncertain how many rate hikes will occur in 2022, but some experts suggest seven. As political and economic situations vary, these predictions will change. You should still expect borrowing prices to go up and certain banks to offer a greater return on your savings accounts. As for inflation, prices will lower gradually over a period of time.