How Another Fed Interest Rate Hike Impacts Your Money

It was all eyes on the Federal Reserve again this week. At Wednesday’s Federal Open Market Committee meeting, the federal funds benchmark rate went up by a quarter of a percentage point, bringing the new range to 5.25% to 5.50%, the highest level in over two decades.

Since early last year, the Fed has implemented 11 consecutive rate hikes (with a brief pause last month) to try to tamp down record-high inflation. Though rising consumer prices have shown signs of cooling, with the year-over-year inflation rate at 3% in June, it’s still above the Fed’s 2% target goal. The average cost of goods and services hasn’t fallen enough.

“Price stability is the responsibility of the Federal Reserve,” said Fed Chair Jerome Powell at Wednesday’s press conference. “Without price stability, the economy doesn’t work for anyone.”

Under pressure to both keep inflation in check and maintain economic growth, the Fed is tasked with striking the right balance. No one wants permanently high prices, but no one wants endless interest rate hikes either, which have been punishing for borrowers and debt holders. 

“On one side, there’s the risk of high inflation, like towering waves that could capsize the ship,” said James Allen, certified financial planner and founder of Billpin. “On the other side, there’s the risk of slowing economic growth, like dangerous rocks lurking beneath the surface. If they steer too far in one direction, they could end up crashing into the other.”

The monetary policy of the Fed has a strong influence over financial markets — and a direct impact on your wallet. With rates increasing again, borrowing could continue to get more expensive, but higher interest rates for savings, money market and CD accounts could get you greater returns on your money.

Below, we’ll unpack what this rate hike means for your money. 

Could this be the end of the Fed’s rate hikes?

There’s no way to predict right now whether the Fed will pause rate hikes in September or hike rates once again. In a short amount of time, the Fed has undertaken a sharp tightening of monetary policy, and moving too quickly or hiking rates too soon risks the Fed overshooting and the economy slipping into a recession, said Phil Neuhart, director of market and economic research at First Citizens Wealth Management. 

July’s and August’s inflation data, as well as unemployment numbers, will play a significant role in influencing the Fed’s next move. “We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation as well as the balance of risks,” said Powell. 

It takes time for the central bank’s efforts to ripple through the system, and the Fed needs to see how different economic factors evolve over the summer.

“Monetary policy works with a lag, so we could potentially see turbulence ahead in various corners of the economy,” said Massud Ghaussy, a senior analyst for investor relations at Nasdaq. 

Still, the forecast looks far less cloudy than it did a year ago. Investors and analysts were long concerned that raising interest rates — which makes borrowing and investing pricier and decreases overall demand for labor, goods and services — could usher in a hard downturn and crack the economy. The central bank always said it aimed for a middle ground or “soft landing,” and now Wall Street seems to be more confident of that possibility. 

During the latest press conference, Powell said that Federal Reserve staff are no longer forecasting a recession due to the resilience of the economy. That statement tracks with economists who were surprised to see stronger growth than expected in the second quarter of this year. 

That doesn’t mean economic turbulence and pain haven’t already happened. In a July 26 letter to Powell, Democratic Sen. Elizabeth Warren of Massachusetts called the Fed’s moves “needless rate increases that threaten the economy.” Noting how the Black unemployment rate has increased at an alarming pace in the last several months, Warren underlined how aggressive rate hikes disproportionately threaten Black workers, who “are usually among the first to lose their jobs when the labor market falters.”

How do the Fed’s interest rate hikes impact savings? 

Ahead of the Fed’s recent move, some banks increased interest rates for high-yield savings accounts. There’s a chance that banks could push rates even higher to remain competitive for deposit accounts — but not by much. “The recent Fed rate hike may not have a significant impact on savings rates offered by banks,” said Joe Camberato, CEO of National Business Capital. 

Regardless of what happens next to savings rates, they’re currently at a record high, with some of the most competitive accounts earning over 4.00% and 5.00% APY. Experts say it’s a good time to set aside money, if possible, while there’s still an opportunity to earn solid returns. Whether inflation persists or the economy slows, extra savings could prove vital as a cushion to ride out the next economic wave. Plus, any accrued interest can offer a nice benefit to the money already saved. 

“From a consumer standpoint, even if the Fed stops raising rates, it remains a great moment for savers,” said John Blizzard, president and CEO of Seattle Bank, last month. For many banks, CD rates are the highest they’ve been in more than 15 years, he added.

Rates for certificates of deposit, or CDs, are experiencing an inverted yield curve, experts say. Normally, long-term CDs, like three- or five-year CDs, have higher APYs than shorter-term CDs, like six-month and one-year CDs. But right now, short-term CDs have higher APYs than longer terms, meaning the chance to earn higher returns on the money set aside for shorter periods.

“History tells us that when this happens, it generally means that the longer-term economic outlook is more questionable,” said Blizzard. 

Most banks aren’t raising rates for long-term CDs, and many believe they’ve reached a peak high and won’t change much over the next few months. For anyone looking to set aside money for a number of years, experts suggest locking in a long-term CD term now before rates drop. 

But everyone’s financial situation is different. A short-term CD is still a prudent move because you can earn interest with a shorter time commitment and lower risk, said Camberato.

How do the Fed’s interest rate hikes impact borrowing? 

When the Fed increases rates, borrowing becomes more expensive for personal loans, home equity loans or credit card debt. Following the most recent Fed hike, annual percentage rates will likely remain high, which means debt can continue to grow if you aren’t actively working on a strategy to pay it down. 

“Higher borrowing costs are already having an impact on consumer behavior,” said Neuhart. He pointed to the housing market, which has been severely slowed down by higher mortgage rates. With more homeowners reluctant to sell their homes because they locked in a low mortgage rate prior to the Fed’s hiking cycle, inventory is being affected, he noted.

And as annual percentage rates for credit cards and loans rose during the past 15 months, many lenders have stiffened requirements, making it harder to get approved for a new credit account. The Fed’s decision will likely continue to reduce the availability of credit, said Chelsea Ransom-Cooper, financial planning director at Zenith Wealth Partners. If the Fed continues raising rates, rather than lowering them as the market expected, credit conditions will tighten even more, making it harder and more expensive to access credit, she added.

A debt consolidation loan can help consolidate high-interest debt into a lower, fixed-rate loan, while a balance transfer card can offer a respite from interest for a period of time.

More importantly, if you’re taking on new debt or getting a new credit card, plan to pay more than the minimum each month to kick down some of the stifling interest, or try to pay in full and on time to avoid high interest charges altogether. And if you’re one of the millions of people with federal student loan debt preparing for repayment in September, focus on paying off other debts or boosting your savings with a high-yield savings account.

The main tool at the Fed’s disposal is its ability to increase or decrease interest rates. Since that and other economic policy moves are out of the average person’s control, financial advisors are urging consumers to tread carefully: to closely examine their finances, beef up their emergency savings and tackle any high-interest debt. There’s still time to take advantage of high savings rates, but with the cost of borrowing also remaining high, work to pay down any outstanding balances as soon as possible.