The Various Ways Rate Hikes Impact Your Money

Hawkish Fed

In response to rampant inflation that’s running up at its highest level in over 40 years, the Federal Reserve is tightening its monetary policy.The central bank has enacted a series of rate hikes in a bid to effectively raise the cost of borrowing money. The Fed announced another 75-basis-point increase yesterday, equaling June’s hike, which was the largest in almost 30 years.

Some on Wall Street had called for an even more significant hike of 100 basis points. It does appear likely the Fed will continue rate hikes for the foreseeable future. The June CPI showed prices rising 9.1% year-over-year, which is over 7% higher than what the central bank considers its inflation target.

Mind Your Credit

The Fed can choose to either raise, lower, or keep its target rate constant. The number dictates the rate banks and lending institutions charge each other when lending money. As a result, people who owe a balance on a loan or credit card are most affected.

Credit cards that have a variable rate are likely connected to the federal funds rate. Right now the average APR on adjustable rate credit cards is 17.13%, but analysts estimate that could rise to 19% by year’s end. People financing the purchase of a car will be impacted. Some predict the Fed’s most recent rate hike could push the average interest rate on a car loan above 5%.

Savings and Student Loans

While the concept of forgiving student loans continues to be debated in the halls of Congress and elsewhere, the Fed’s most recent rate hike will undoubtedly impact borrower’s balances. Some private student loans are tied to Treasury bill rates or the federal funds rate. As the Fed enacts hikes, borrowers pay more interest.

There is a financial upside associated with rate hikes. Money deposited into savings accounts will earn more interest. That said, it’s worth considering how much that higher rate of interest is doing for you. If the rate of return is at 2% annually, that’s not much to write home about when prices are increasing up over 9%. As the effective cost of borrowing changes, it’s important to consider where your money resides.

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