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The Fed just raised interest rates in a move that could spell trouble for some Americans trying to get ahead financially. The interest hike in the federal funds rate might impact consumers in many ways, but how Americans feel the change partially depends on whether they're spenders or savers.
Here's what the interest rate could mean for consumers and what you might want to do in response.
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Why the Fed raised the interest rate
During the September meeting, the Fed raised the benchmark interest rate by 0.25 percentage points, bringing it to a range of 3.75% to 4%. According to Fed Chair Kevin Warsh, the quarter-percentage increase is an attempt to regulate the surging inflation that has driven up the cost of living and left many people struggling to pay for food, gas, and housing.
By raising the interest rate, the Fed increases the cost of borrowing money. In doing so, it may reduce demand, which may reduce prices. It marks the first time the Fed has hiked interest rates in three years.
How consumers might experience the rate hike
Consumers might experience the rate hike differently depending on their financial situation. Consumers who have less financial stability, have lower incomes, and who have or need to take out multiple forms of debt might feel the effects sooner and more strongly.
In comparison, consumers who are very financially stable, who have high incomes, and who have numerous assets may feel the effects of the interest rate hike less.
Additionally, the rate hike may impact certain financial elements sooner than others.
Credit card rates
The benchmark interest rate is most closely reflected by credit card interest rates. It's possible that variable credit card interest rates may increase by a quarter percentage point in the next one or two billing cycles.
Consumers who carry a balance on their credit cards may feel that impact, especially if they carry larger balances on credit cards for longer periods of time. Though a quarter percentage point increase may have a minimal impact on smaller balances, those higher payments may add up. The rate hike might be particularly impactful on consumers who are already struggling to pay their credit card bills, or who have fallen behind on payments and are facing late fees on top of their interest and minimum required payments.
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New auto loans
The higher benchmark interest rate may also be reflected by an increase in interest rates on auto loans. Those increases may affect consumers who plan to take out a new auto loan, but since most car loans feature a fixed rate, the hike shouldn't increase interest on existing loans.
Even a small interest rate increase may have a significant impact when applied to a vehicle purchase. Plus, since the majority of the members on the Fed committee that sets interest rates indicated at least one quarter-point increase is likely to come this year, consumers who plan to buy a new car this year might save on interest by doing so ahead of that second rate hike.
Mortgage rates
Things get more complicated when considering the potential impact on mortgage rates. Though mortgage rates are sometimes affected by the Fed's benchmark interest rate, sometimes mortgage rates also move independently of the Fed rate. Mortgage rates depend on other factors, including jobs and how fast prices are rising, so the benchmark rate doesn't entirely regulate mortgage rates.
Many lenders saw the rate hike coming and have already incorporated it into mortgage rates, meaning homebuyers might pay higher rates on new mortgages. Similarly, adjustable-rate mortgages may have already seen or might still see an interest rate increase.
High-yield savings accounts and certificates of deposit (CDs)
A higher benchmark interest rate may be a positive change for Americans who have money in high-yield savings accounts or CDs. As the benchmark interest rate increases, the rates on these savings tools typically increase, too, though it may take banks more time to raise rates on savings accounts than it does to lower them.
Consumers with high-yield savings accounts may see better yields over the next few months. Since the interest rates apply to the entire balance of an account, even small increases may boost savings for individuals who have accumulated larger amounts of money.
Bottom line
The Fed's move to raise the interest rate isn't necessarily a good or bad thing, and its impact on your finances depends on your specific financial situation. If you have any variable-rate debt, such as a variable-rate credit card, be sure to check your next statement for any potential rate change and how it might affect your minimum payments and your balance. If you're a saver with a high-yield savings account or CD, check your current APY against the rates that are newly available to see if it makes sense to switch to a different account.
A higher interest rate might affect any new debt you're considering taking on, so review rates carefully. That same higher interest rate may be a perk if you've worked to save money, and it might even help you grow your wealth.
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