Nov. 9, 2022
Learn to manage your life and your finances independent of interest rate fluctuations
The Federal Reserve raised interest rates again. The latest raise was 0.75%. If you’re keeping track, that’s six rate increases in 2022. In March, the Fed started the year with a rate increase of 0.25%. It was the first rate increase in more than three years. Is this going to keep happening? Will there be more rate increases in the near future? It’s possible. But let’s take a look at what it means for you and your money.
Here’s What Happened Recently
The latest interest rate hike of 0.75% was announced on November 2, 2022. Federal Reserve Chairman Jerome Powell said, “The Fed is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.”
To gauge just how long that may take, the U.S. inflation rate is 8.2% using the most recent government data. Based on Powell’s comments, we may continue to see rate hikes for the foreseeable future until that inflation number comes down.
The Big Picture on Interest Rates
Our goal is to equip you with the latest, relevant information to make good financial decisions. And in the case of interest rates and inflation, it’s helpful to know the big picture, so when you see a headline about “rate hikes” or “inflation is rising,” you’ll know what that means for you and your money.
Here’s a very brief economics lesson in just a few bullet points for context.
- Interest rates are what financial institutions charge consumers to borrow money. The Fed sets those rates which can fluctuate depending on various economic conditions.
- Higher rates – borrowing is more expensive; saving is more appealing.
- Lower rates – borrowing is less expensive; saving is less appealing.
- Inflation is an overall increase in the prices of goods and services. The U.S. Bureau of Labor Statistics calculates inflation using a measure called the consumer price index (CPI), which tracks the monthly change in prices paid by U.S. consumers like you and me.
What Does It Mean for You and Your Money
The Federal Reserve may continue to raise interest rates to lower inflation. While we don’t know the details about inflationary changes or future rate hikes, we do know what it means for you and your family. When rates are up, borrowing is more expensive. When rates are down, borrowing is less expensive. More specifically, here are a few key ideas to keep in mind.
If you’re in the market for a new home loan, you will likely pay more now than if you were to have locked in a fixed rate last year. Financial institutions typically raise mortgage rates when the Fed increases interest rates. If you already have a fixed-rate mortgage, you shouldn’t see any change to your rate or monthly payments. Adjustable-rate mortgages (ARM) may increase, however. Be sure to check with your financial institution about how rising rates may affect your home loan.
Credit Card Rates
Credit cards are considered revolving credit and have a variable interest rate that can fluctuate with market interest rates. Higher interest rates mean you pay more for the money you borrow. For instance, if you had a credit card with an 8% interest rate a year ago, chances are that rate is going up. Your credit score does play a factor in your credit card interest rate, so if you have excellent your interest rate may not increase as much. But variable rate cards will vary. And interest rates are a significant component of that.
Save Your Money
We already know that mortgages, auto loans, and credit cards will have higher rates in a rising interest-rate environment. So, if you’re not borrowing, what can you do with your money? Great question. In these economic situations, we typically see rates on a certificate of deposit (CD), or savings accounts increase too. Individual financial institutions will have their rates so check your bank or credit union for the potential to make a little more on your savings.
Real World Applications
Hopefully, this is instructive and helpful. The intent is to give some economic context, so you know what the latest headlines on interest and inflation mean for you and your wallet. Interest rates go up, and the amount you pay in interest for a mortgage, auto loan, and credit card goes up. But it’s a better time to save. The return on a certificate of deposit, high-yield savings accounts, and some government bond investments will also be incrementally higher.
You can see how raising rates affect economic behavior. If it costs you more money to buy a house or a car, maybe you put off buying for a little while. Conversely, if your bank offers a higher return on your savings account, maybe you decide to move a little more into savings and wait for interest rates to fall before buying a car.
Your Next Steps
Equipped with some new economic insight on interest rate hikes and inflation, you can now take the next steps forward. If you have an adjustable-rate mortgage, check with your financial institution to see what you can do to lower your rates as much as possible. If you have high-interest-rate credit cards or other loans, now may be a good time to refinance those loans or transfer balances to a lower-rate card. It may be the perfect time to check into a high-yield savings account to take advantage of increased rates. While we can’t control what the Fed does now or in the future, at least now you have some things that you can do to better your financial situation.
This blog is available for Granite State Credit Union members through CreditSavvy, in partnership with, and powered, by SavvyMoney. To learn more about CreditSavvy click here: https://www.gscu.org/learn/creditsavvy.html