The Federal Reserve voted to raise interest rates for the first time since 2018 and has several more rate hikes planned for this year.[1] Rising interest rates can have significant effects on the economy and your finances. Between a volatile market, high inflation, and rising interest rates, know how you’ll respond.
The Federal Reserve Raising Interest Rates for the First Time Since 2018
The Federal Reserve recently voted to raise interest rates for the first time since 2018. They will raise the benchmark federal funds rate by a quarter percentage point to a range between 0.25% and 0.5%. The federal-funds rate influences other consumer and business borrowing costs throughout the economy, including rates of mortgages, credit cards, savings accounts, car loans, and corporate debt. They have six more increases scheduled by the end of the year to almost 2%, the most aggressive pace in over 15 years.[2]
What Do Rising Interest Rates Mean for You?
Rising interest rates can sometimes lead to market volatility. The market tends to respond poorly to higher borrowing costs because it makes the cost of doing business more expensive.[3] Higher interest rates mean paying more interest on a mortgage, car loan, or any other loan. It also means that savings accounts, CDs, and fixed annuities may pay more in interest. The market prices of existing bonds immediately decline after a rate hike because new bonds coming onto the market will offer higher interest payments.[4]
Will This Tame Inflation?
Inflation is running at its highest level in 40 years, with the latest measure of 7.9% year-over-year. The Federal Reserve is raising interest rates to combat inflation, but no one knows the effect it will have. Americans are paying more at the pump and are seeing overall higher prices. According to a recent study, the average American household will pay almost $2,000 more in gas and $1,000 more on food in 2022.[5] Consider the effect on your nest egg if your savings account and CD were still earning less than the inflation rate.
[2] https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
[3] https://www.investopedia.com/investing/how-interest-rates-affect-stock-market/
[4] https://www.cnn.com/2022/03/17/success/rising-interest-rates-investments-and-savings/index.html
[5] https://www.foxbusiness.com/economy/how-much-will-inflation-and-record-gas-prices-cost-the-average-american-family-in-2022
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