Fed Rate Hike: How Will It Affect the Lives of Americans?

8th April 2023

It is expected that the Federal Reserve will raise interest rates again soon. This measure is conducted to fight against higher inflation rates and is done for the seventh time in 2022. The US central bank has just approved a 0.5 percentage point hike.

It is a more general pace that is meant to cool inflation. Moreover, this solution will affect the lives of Americans. Keep on reading to find out what you can do to protect your finances.

Fed Raises Key Rate by Half Point

We all understand the need to fight against inflation as it keeps going up. Higher inflation rates seriously affect American consumers as more and more households are living paycheck to paycheck these days. Those who feel pressed for money have to take out lending options such as loans like Lendly to get extra cash until the next paycheck.

The Federal Reserve decided to reinforce its fight against inflation by raising the key rate by a half percent. This measure was done for the seventh time, so it is expected that new hikes will come soon.

This hike was smaller compared to the previous ones, as the inflation rate demonstrated signs of easing. Yet, according to the Federal Reserve, a higher rate is necessary to tame the rising inflation as it may strike the American economy.

Consequences of This Decision

Raising the interest rates in smaller hikes is better for consumers. Any raise will definitely affect consumers and households. How will it happen? The total cost of borrowing will increase as well. Thus, raising rates to cool inflation will make it more expensive for people to take out loans.

Those who already struggle to make ends meet will have to request more crediting tools, such as payday advance apps in the App Store or loans, and cut down their spending. On the other hand, this decision is essential to slow down the speed of price increases and prevent further inflation.

So this is good news for Americans as prices will be stabilized, so many households will be more confident in their finances. Low-income families and those who have multiple credit cards or serious loan debt will be hurt by this decision.

People with variable-rate debt will struggle the most. For instance, if you have numerous credit cards with a variable rate, you should be prepared that this rate will increase, so you will have to pay back more.

The effective federal funds rate (EFFR) is computed as a volume-weighted average of overnight federal funds transactions reported in the FR 2420 Selected Money Market Rates Report. The Federal Reserve Bank of New York data shows that EFFR was 4.25% in 2006 compared to 4.33% on December 19, 2022.

Source: https://www.newyorkfed.org/markets/reference-rates/effr

What Does It Mean to You?

Consumers who borrow money for their urgent needs, use money loan apps in the Google Play, and take out loans will be affected by this new increase in the rate by the Fed. The financing expenses and the overall cost of borrowing will go up, so consumer debt will rise as well.

Are there any benefits? Yes, people who have a savings account or an investment fund will be able to take advantage of this situation, as higher interest rates will mean higher earnings on their deposits.

Credit card owners and borrowers with variable-rate debt will struggle the most. The interest rates on credit cards are already sky-high, and they will keep on increasing. For example, the rate on home equity loans has been the highest for the past 15 years, and car loan rates hit the highest in 11 years. On the contrary, the CD yields and online savings accounts haven’t been so high for the past 15 years.

Here is how the increase in the Fed rate will affect consumers:

  1. Credit Cards

Annual percentage rates on various credit cards are over 19% now. In January 2022, these rates were 16.3%, so there is a rapid increase. No matter how good your credit rating is, you will still be offered a credit card with an APR of at least 18% these days.

It is necessary to mention that consumers who apply for new credit cards will need to accept higher variable rates together with those who already have their cards. Be prepared for the rate boost in the nearest future and think about ways to prevent high credit card debt.

Try your best to pay at least the minimum balance each month. As salaries don’t keep pace with inflation, more American families will lean on this lending tool to afford to pay for necessities.

  1. Mortgages

The good news is that a 30-year or a 15-year mortgage will come with fixed interest rates as it’s connected with the economy and Treasury yields. Yet, the purchasing power for new homes will be lower due to the Fed’s new policy changes and inflation.

Mortgage interest rates are still rather high even though they are slightly reduced. In November, the average mortgage rate for a 30-year option was 7.08%, while now it’s 6.33%.

If you choose a home equity line of credit or adjustable-rate mortgage, the prime rate will rise with the increase in federal funds. The median interest rate for a HELOC is 7.3% compared to 4.24% at the beginning of the year.

  1. Car Loans

The interest rates on new auto loans and the price for all autos are increasing. If you repay an existing car loan with a fixed interest rate, your payments won’t suffer. However, those who are just planning to purchase an auto will have to pay much more in the long run. At the beginning of 2022, the median interest rate for a car loan was 3.86%, but now it’s 6.05%.

  1. Savings Accounts

Due to the recent news, the interest rates on savings accounts are rising. Consumers who have a savings fund will be able to grow their earnings as the rates will increase. The rates decreased significantly during the global pandemic, but top-yielding savings fund rates are 4% today, which is higher than the rates offered by conventional banking institutions.

The Bottom Line

In conclusion, the Federal Reserve raised interest rates to fight inflation. American consumers are affected by this solution as variable interest rates on existing debt options will rise too. However, those who have savings accounts will benefit and have higher earnings due to the interest rate increase.