The Federal Reserve’s 0.25% Interest Rate Hike: How it Affects You

What you can expect for your savings, loans, and investments.

Just yesterday, (Wednesday, February 1, 2023) The Federal Reserve decided to raise the interest rate of targeted federal funds by a quarter point. This was done for the eighth time in a row. The Federal Reserve states that the reasoning behind this increase is due to persistent inflation, even though it seems as though inflation pressures have started to ease. The question you may find yourself asking now is “how does this interest rate increase affect me?” In this article, we will look at some of the ways this increase in interest rates will affect the average American.

What is the federal reserve interest rate?

There has been much talk about the increase in federal interest rates, but before we look at how it will affect you, we should try to understand what exactly they are. The Federal Reserve interest rate (otherwise known as the federal funds rate) is the amount of interest that banks charge each other to borrow or lend money overnight. This is different from the rate consumers pay, however, this still affects them in a few different ways.

What this means for you

Now that you understand how federal interest rates work, you might think it isn’t going to affect you. Unfortunately, the average American will still be affected by this due to how reliant we are on our banks. Here is a list of the main things you’ll notice due to this increase:

Increased Credit Card Rates

Credit card borrowing rates have already been pretty high, and after this increase, they’re only going to get higher. Because banks now have to pay more to borrow, it only makes sense that the rates for borrowing with a credit card will also go up. Credit card debt is no joke, so an increase in borrowing rates is going to unfortunately cause it to become more common.

Home Ownership

Mortgage rates have been at an all-time high, and they are expected to stay that way with this increase in interest rates. While your current mortgage rate might not increase, it is not expected to go down either. This combination of increased interest rates and high mortgage rates makes it much harder for Americans to purchase homes. The housing market has been especially unaffordable this past year, so those who have to deal with increases in other expenses will likely have to wait before buying.

Auto Loans

Auto loans are another payment that might become more expensive. While auto loans might be a fixed price, the cost of cars has been inconsistent in the past year. Some prices are lower while others are higher, but with an increase in expenses elsewhere, buying a car is likely going to be more expensive.

Student Loans

Some student loans may be affected by this increase in interest rates, but thankfully this does not apply to all of them. Some student loans are tied to a bank which will cause their interest to increase, but that isn’t the case for all of them. There is also the ongoing case for student loan forgiveness that has the potential to forgive up to $20,000 in student loan debt, so some who have student loans might not have to worry should they actually be forgiven.

Savings Accounts

One bit of good news in the midst of all of this is that the interest rates on savings accounts are currently at an all-time high. As a result, it’s a good time to open a savings account if you’re able to do so. Unfortunately, inflation will offset money earned from savings, it might still be worth it, as inflation might eventually start to go down.

What should you do from here out?

The increase in the federal funding rates might not be immediately noticeable to you, but it’s important that you’re aware of some of these changes it will bring. Budgeting and saving are some of the best ways you can combat this. It’s also a good idea to avoid taking out any types of loans for as long as possible. While increased interest rates might be a scary topic, how you prepare for them is what will determine how it affects you in the long run.