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How the Fed's interest rate hike could impact your wallet

Federal Reserve Building
Posted at 6:42 PM, Mar 16, 2022

CLEVELAND, Ohio — In an effort to rein in soaring inflation levels, the Federal Reserve announced Wednesday it would raise its benchmark short-term interest rate. The hike could affect the way you buy, borrow and save money in the coming years.

After several years of near-zero rates to help stimulate a lagging pandemic economy, the Federal Reserve is changing course to stabilize the highest inflation the country has seen since the 1980s. The quarter-point increase in the federal funds rate Wednesday marked the first of what will likely be multiple incremental increases this year.

”We are moving out of the pandemic, hopefully, and I think there was always an expectation that the Fed would need to raise rates and move out of this heavy intervention time period,” said Michael Goldberg, an associate professor in the Department of Design and Innovation at the Case Western Reserve University Weatherhead School of Management.

He explained there is a direct correlation between interest rate hikes and financing for borrowers, though there’s typically a lag between the increase and the impact felt by consumers.

MORTGAGE RATES

Raising the interest rate will have the most noticeable effect on loans, including mortgages. It could be a potential pain point for prospective home buyers already facing the challenges of low inventory and high home costs.

“You really had to be on top of what was new to the market if you wanted a shot at getting it,” said Andrew Linebarger, who will close on a house next week. “Even if you did want to put in an offer, you’d be up against cash offers, 20,000 over asking, so it was frustrating.”

Linebarger’s home search took nearly a year, in which time mortgage rates climbed. Between November and January, they increased by a full percentage point.

“I was talking about this with my sister. She roasts me because she got mid-low twos and I’m in low fours as far as rates go,” he said. “We’re very happy to have gotten in on the upswing before it maxed out. It could have been better, but it easily could have been worse as well.”

Realtors point out mortgage rates are still below pre-pandemic levels.

“We've gotten a little spoiled. They're up maybe in the threes, lower fours and people are like, ‘Oh my gosh, rates are so high.’ They're higher than they were, but they're still historically low,” said Angela Thompson, a realtor and owner of Monument Real Estate Services.

She hopes the rising rates will help cool the hot housing market and bring costs back down.

“It’s going to kind of steady out a bit. We might get to a neutral market, where it might not necessarily be a buyer's market or a seller's market. But in the near future, prices will continue to go up a little bit,” Thompson said.

She explained communities of color, who historically face disproportionate hurdles to lending and accurate appraisal, will likely feel the brunt of the impact from higher interest rates.

“Your buying power is now being diminished,” she said. “We know incomes aren't necessarily going up at the same rate, we've got inflation that is taking place, and generally opportunities are just fewer in our communities. So we're largely impacted by that.”

READ MORE: ‘Double Trouble’ presents extra challenge for minority homebuyers

Thompson recommends any person looking to purchase a home focus on boosting their credit score in order to qualify for better rates and down payment assistance.

CREDIT CARDS AND OTHER LOANS

Your minimum monthly credit card payment could increase along with interest rates. The Fed’s hike is expected to increase credit card interest rates from about 16% to 17%. If you make only the minimum payment each month, the total debt could increase by $300-$400.

Student loans, auto loans, and other types of debt could also be affected.

INVESTMENTS

Bonds and growth stocks could also see the effects.

“In general, the stock markets had a remarkable rise over the last year. A lot of that was due to companies being able to grow because they could access inexpensive capital,” said Goldberg. “So there is a belief that there will be some market correction because of more expensive capital.”

He explained investment portfolios, such as 401Ks and other retirement savings could fluctuate as well, because of both rising interest rates and the volatility caused by the conflict in Ukraine.

BENEFITS

The idea behind raising the Fed’s interest rate is to lower consumer spending and effectively tame rising inflation rates. If it has the desired effect, consumers could see prices go down on everyday products like clothing, food, and other goods.

Your savings account could also get a boost from higher interest, though it typically takes several months for banks to raise their rates.

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