US citizens are facing another federal interest rate increase that could mean troubling developments for your money. Consumers and businesses are preparing to spend more money on interest payments in the upcoming months as one of the central bank’s strategies to combat inflation. By increasing the current federal interest rate, federal funds become more expensive, meaning that the cost of your loans will be higher.
While the ultimate goal of the latest federal interest rate increase is to address ongoing inflation, the increased cost of credit and loans might challenge US citizens unprepared for the impact of a federal interest rate increase. This article will help you understand the new growth, from what it means to why it’s happening and how your money will be affected.
What is a Federal Interest Rate Increase?
Federal interest rate increases involve the US federal government increasing the prices of credit and loans for citizens and businesses. When the federal interest rate increases, so do the cost of interest payments for any business or consumer currently paying off loans.
The US Federal Open Market Committee announced a hike in interest rates that brings the federal funds rate up 75 basis points and a range of 3-3.25%. Interest rate increases occur when the US federal government attempts to combat inflation, which currently stands at a high rate that could further damage the US economy.
The US Federal Reserve influences numerous parts of your life as a worker. The Federal Reserve can impact your job security, debts and loan payments, financial portfolio, and other factors that affect your employment and reliability as a worker.
Why is the Federal Interest Rate Increasing Now?
The latest federal interest rate increase will have a massive ripple effect on consumers, workers, and businesses. Because of this, it’s essential to know why the rate is increasing in the first place.
Though recent months have shown promising results for job gains and lower unemployment rates, inflation is still a significant issue for the US economy. The threat of inflation currently outweighs the positive growth in some areas of the US economy, and prices across the US market have risen 6.3% within the last year.
High inflation rates can cause significant damage to the economic well-being of the US. Increasing the federal interest rate will help lower inflation to a less severe level that will benefit the economy. Inflation takes quite some time to decrease in a meaningful capacity. Ultimately, consumers, businesses, and workers will notice the impact of the increased interest rate.
One goal of the federal interest rate increase is to encourage Americans to save money and earn higher interest payments, potentially leading to lower inflation rates and improved economic processes. While increasing the federal interest rate may have positive impacts in the long-term, short-term effects will likely damage finances for many US citizens.
How the Federal Interest Rate Increase Will Affect Your Money
There are three main ways that the federal interest rate increase will affect your money in the upcoming months: higher credit card interest, costlier mortgages and loans, and increased rates on your savings accounts. Preparing yourself for these effects is crucial to navigating your finances shortly.
More Expensive Credit Card Interest Rates
One concern of many US citizens with the latest federal interest rate increase is the increase in credit card interest rates and debt. Commercial banks shift policies about how much they charge for short-term loans like your credit card debt when the federal interest rate increases. By increasing the federal interest rate, your credit card debt becomes costlier because interest rates on consumer debt tend to grow alongside the federal interest rate.
Additionally, increases in federal rates cause expensive borrowing costs that ultimately reduce demand from financial institutions looking to borrow money. Raising the federal interest rate causes banks to raise their rates, making your loans costlier and causing your APR rate to increase.
For example, if your current APR rate is at 16.25%, an increase of this amount would bring it up to somewhere around 16.75%. While you might assume this is a minor adjustment, it can significantly impact your finances. The more your credit card interest rate grows, the more challenging it becomes to pay off your debt and the more debt you will likely incur.
A possible solution to this issue is looking into a 0% APR credit card that can minimize the extra money you pay on your credit card debt. While APR cards will help you finance new purchases and manage your debt to some extent, they require diligent care. When your 0% APR period ends, your leftover balance starts to accrue interest, meaning that you need to have a plan to get your card paid off before the end of your introductory period.
Costlier Mortgage and Loan Rates
The recent increase in the federal interest rate will also impact your current mortgages and loans. If you are currently borrowing money from the bank to purchase a home or tap into your home equity, you will likely see an increase in your housing bills over the upcoming months. First-time homeowners might struggle to navigate their newest purchase with the increased federal interest rate. While rates commonly peak during the summer, this won’t be true for this year, as rates have reached a 14-year high.
It is important to note that any short-term home loans with floating rates are tied entirely to the federal funds rate. When the federal interest rate increases, so do the rates of your loans.
Federal interest rates and policies influence fixed mortgage rates. The newest growth means your yield rates will rise. If you have a long-term mortgage, you will likely feel the impact of the latest increase because your mortgage depends on the 10-year Treasury yield that guarantees your repayment plus accrued interest within ten years.
America’s rising inflation rates mean lenders often have to offset your borrowing power, affecting your loans and overall finances. Higher mortgage rates will cause trouble for many homeowners—however, it may also help improve the oversaturated housing market. If you are currently house-hunting, you must consider precautions like locking in your interest rate as soon as possible before additional increases occur.
The federal interest rate increase will also affect student loans, meaning that anyone with a remaining loan balance might start seeing an increased rate. Refinancing your loans could potentially help you save more and avoid costly debt. However, refinancing should be thoroughly considered and understood before making this decision.
Increased Rates on Your Savings Accounts
While there isn’t a direct connection between federal funds and deposit rates, banks have recently begun increasing how much annual percentage yield (APY) they pay on deposit accounts, such as savings and money market accounts. Financial institutions benefit from raising rates to encourage consumer deposits—however, this increase will occur slowly compared to the other factors on this list.
Banks and financial institutions will likely take time to increase yields. People who bank online will have different experiences than those working with large banks. You will see increased APYs on your deposits based on your banking institution. Banks with large institutions will notice that these banks are increasing their rates faster. These increases happen because larger banks compete to gain more consumer deposits.
Anyone looking to get a higher yield in the current economic climate should consider alternatives like online banking or a credit union. Currently, the best high-yield savings accounts are paying around 5% APY on their deposits. Navigating the federal interest rate increase means you must consider where you’re storing your cash and the type of institution you’re banking with today.
Though borrowing money from financial institutions will cost more with the federal rate increase, you will find some benefits of higher interest rates, mainly if you are all about saving. As your bank transforms your deposits to fund your loans, yields increase. Regardless, it is crucial to remember that this will be a slow process, and it might take time for you to notice a significant difference.
Solve Your Debt Problems With Sadek Bankruptcy Law Offices
Even experts in financial literacy can struggle during times like these. With the increased federal interest rate, you might worry about the logistics of paying your loans and how you will maintain your financial well-being.
If you are worried about accruing higher interest rates, paying off loans on time, or how your savings account will be affected by these changes, it is helpful to seek the advice of lawyers and legal experts. The experts at Sadek Bankruptcy Law Offices create a practical course of action for your financial future.
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