This number is the base of the prime rate, which serves as a starting point for financial institutions to set interest rates. From mortgages and personal loans to credit cards and savings, simply put, you could soon see changes in your borrowing and savings accounts. Here’s a look at why the Fed is raising rates and what it means for you and your money.
Why the Fed is raising rates
The Fed has a target inflation rate of 2%. Over the past two years, the rate of inflation – which is the rate at which prices have increased over a given period – has continued to rise due to the COVID-19 pandemic, supply chain disruptions and the ongoing war in Ukraine. It is now consistently at the highest level in 40 years – over 8%. The hope is that a hike in the fed funds rate will eventually help stabilize the rate of inflation.
History tells us that raising the rate will cause interest rates to rise overall, making it more expensive for businesses and individuals to borrow money. This would eventually slow aggregate demand for goods and services, allowing the market to catch up to the target inflation rate.
How consumer loans will be affected
Unfortunately, while this may help the overall market, it may also impact the interest rate you have for variable rate consumer loans (such as personal lines of credit, credit cards and home equity lines of credit). This means that you will likely see a slight rise in interest rates in the weeks and months to come.
For example, credit cards often have variable rates, so you’ll find yourself paying more on your credit card balance if and when those rates go up. If the thought of rising credit card rates has you worried about how much card debt you have and what your monthly payment will look like, it may be worth considering debt consolidation advice or speak to a financial advisor to discuss your options.
A home equity line of credit is another product worth discussing when looking at the effects of the Federal Reserve rate hike. As interest rates rise, now may be the perfect time to lock in a fixed rate on your outstanding mortgage balances, if you have that option.
Home equity rates are going to be very responsive, especially in this rising rate environment, so locking in your fixed rate now can help you save money on interest and long-term payments. It’s also worth noting that if you were hoping to access the equity in your home, a hybrid home equity would be a great option over a cash refinance, as a home equity line of credit will allow you to keep your current mortgage. rate while allowing access to the equity in your home.
How savings will be affected
While the increase in the federal funds rate could have a negative impact on consumer loans, the opposite can be said for savings accounts. Again, history tells us that deposit account rates generally increase when the federal funds rate increases, but this may depend on the type of accounts you have and the institutions you do business with.
Although deposit rates generally increase after the federal funds rate increases, there are other factors that institutions should consider before raising their rates. These factors include supply and demand for more income, or the need for the institution to bring in more money. It’s important to investigate and take advantage of everything your financial institution has to offer in order to get the most out of your hard-earned money. Keep up to date with interest rates, deposit accounts and fees, and speak with a financial advisor to make sure your money is in the right place.
“Let’s Talk Money” is powered by CommunityAmerica Credit Union. This week’s article comes from Regional Market Manager Laura Jones. Have questions? Stop by your nearest CommunityAmerica branch or make an appointment to speak with a CommunityAmerica Financial Advisor.
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