What the Federal Reserve's Interest Rate Hike Means for You

The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting. This would put the target range for the federal funds rate at 2.25-2.50%.

This time, Fed officials are expected to approve a 0.25 percentage point increase as inflation starts to ease. This would represent a more modest pace compared with earlier super-size moves in 2022.

Even a small increase in the benchmark interest rate can mean higher costs for borrowers with credit cards, student loans, and other types of debt. On the other hand, savers may see better returns on their investments.

According to Personal Finance, a rolling recession is a recession that impacts you on a personal level. Almost half of Americans think we're already in a recession, so if you're looking for a raise, your chances may be better now.

Yiming Ma, an assistant finance professor at Columbia University Business School, said that the worst is over and that things are looking up. This is good news for everyone involved.

The U.S. central bank has raised its benchmark interest rate by 4.25 percentage points in less than a year, and is now in the midst of a rate hike cycle.

Ma said that although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially” and the pace of rate hikes is going to slow.

The goal is still to control inflation by making it more expensive to borrow money and effectively slowing down the economy.

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. This rate influences borrowing costs for consumers and, to a lesser extent, the rates they earn on savings accounts.

Here's a quick overview of how it works:

There is a direct connection between the Federal Reserve's benchmark interest rate and the interest rates on credit cards. As the federal funds rate rises, so does the prime rate, and credit card rates follow suit. Cardholders usually see the impact of this within a billing cycle or two.

The average credit card rate is now 19.9%, on average — an all-time high. With the Federal Reserve committed to raising its benchmark to combat inflation, credit card annual percentage rates are expected to continue climbing.

Households are increasingly turning to credit to cover basic expenses, as incomes have not kept pace with inflation. This makes it even more difficult for borrowers who carry a balance from month to month.

"Credit card balances are rising at the same time credit card rates are at record highs, which is not a good combination," said Greg McBride, chief financial analyst at Bankrate.com.

If you currently have credit card debt, you can tap into a lower-interest personal loan or a 0% balance transfer card. McBride advised against putting any additional purchases on credit unless you can pay the balance in full at the end of the month. He also recommended setting some money aside.

Although mortgage rates are fixed, anyone shopping for a new home has lost purchasing power due to inflation and the Fed's policy moves.

"Mortgage rates could remain near where they are over the coming weeks, or even continue to trend down slightly," said Jacob Channel, senior economist for LendingTree. This is despite the likelihood of another rate hike from the Federal Reserve.

The average rate for a 30-year, fixed-rate mortgage has fallen to 6.4%, down from its peak of 7.08% in mid-November. This is good news for potential homebuyers who are looking to take advantage of current market conditions.

Despite the relatively high rates, Channel noted that buying a home is still a challenge for many due to the persistently high prices of homes.

Adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are both pegged to the prime rate. As the federal funds rate rises, the prime rate does as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.

Even though auto loan payments are fixed, they are getting bigger because the price of cars is rising, along with the interest rates on new loans. So if you're planning to buy a car, you'll have to pay more in the months ahead.

The average interest rate on a five-year new car loan has increased from 3.96% at the beginning of 2022 to 6.18%.

"The combination of higher prices and repeated interest rate increases is making monthly loan payments more expensive," Thomas King, president of the data and analytics division at J.D. Power, said in a statement.

Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing. Those with lower credit scores may have to look for alternative financing options or be willing to pay more for their vehicle.

Federal student loan rates are fixed, so most borrowers won’t be affected immediately by a rate hike. The interest rate on federal student loans taken out for the 2022-23 academic year has already risen to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.

Private student loans usually have a variable interest rate that is tied to the Libor, prime or Treasury bill rates. This means that when the Fed raises rates, borrowers will also have to pay more in interest. However, the amount of additional interest will vary depending on the benchmark.

For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends. The Education Department expects the payment pause to end sometime this year.

The good news is that interest rates on some savings accounts are higher after a series of rate hikes.

The Federal Reserve's target federal funds rate does not directly influence deposit rates, but the two tend to be correlated. Savings account rates at some of the largest retail banks were near rock bottom during most of the Covid pandemic, but have currently risen to an average of 0.33%.

Online savings account rates are typically much higher than those offered by traditional banks, due in part to lower overhead expenses. According to Bankrate, some of the highest-yielding online savings accounts offer rates as high as 4.35%.

According to McBride, if you are shopping around for the best returns, you are doing better than most people since the great financial crisis. However, if you are not shopping around, you are still not earning very much.

Although any money that earns less than the rate of inflation will lose purchasing power over time, households have less set aside in general.

McBride advises that the best way to save money is to pick up a side hustle to bring in additional income, even if it’s just temporary. By paying yourself first with a direct deposit into your savings account, you’ll create a pathway to saving money.