When the Federal Reserve raises interest rates, the impact trickles down to consumers. The Fed controls a key short-term interest rate called the federal funds target rate, which banks charge each other to lend money overnight. Its goal is to stimulate economic growth or curb inflation by raising or lowering the cost of borrowing, which influences everything from savings rates to credit card and mortgage rates.
When rates rise, it costs more to borrow, so consumers spend less. This slows the economy, reducing demand for cars, homes and other items. It’s a fine balance that the Fed attempts to strike between slowing the economy and lowering inflation.
For savers, higher rates boost the return on their bank deposits. They incentivize people to put their money into savings accounts, money market accounts and certificates of deposit. But a rising interest rate environment also hurts bond prices.
It’s important to understand the connections between interest rates and your finances. As rates ebb and flow, they influence your financial decision-making and can affect your budgeting. It’s especially important to be aware of how rates change if you have existing variable-rate debt such as credit cards, personal loans or home equity lines of credit (HELOCs). If you plan on taking out a new loan or financing an existing one, now may be the time to act, before rates rise again. You can always consult a financial advisor to learn more about how to prepare for an interest rate hike.
