Financial Education Blog

How Federal Interest Rate Decisions Affect Your Finances

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The Federal Reserve and its federal interest rate have made a lot of headlines in recent weeks and months as the agency moves forward with plans to institute multiple rate hikes in 2022.

 

While these interest rate decisions receive a lot of attention in the media and can even cause volatility in the stock market, many consumers may be unaware of the implications these decisions can have on their personal finances.

 

With interest rate increases on the horizon, now is a good time to brush up on what to expect regarding your loans, savings accounts and other financial products.

What is the federal interest rate?

The federal interest rate is a target interest rate that guides the rate banks charge to one another when lending money overnight. In turn, this rate dictates the typical interest rates offered to consumers.

 

When the target interest rate goes up, it drives consumer rates up accordingly. The same is true when the target interest rate goes down. This target rate is raised or lowered periodically throughout the year and can be influenced by many different factors.

 

For anyone looking to buy or refinance a home, purchase a vehicle, or take out a loan for any other purpose, this federal interest rate is important to keep an eye on — especially if you’re looking to time your loan application to capture the best rates possible.

 

Why does the Federal Reserve change interest rates?

The Federal Reserve’s decision to change interest rates is used primarily as a tool to manage the U.S. economy. 

 

Typically, the Federal Reserve lowers interest rates when the economy is slowing down or even in cases where there are signs of economic stagnation. Lower interest rates then inspire increased spending. This is why home loan rates have been relatively low compared to historical rates since the housing market crashed and triggered a recession in 2008 and 2009.

 

When the economy is strong, though, rates are pushed higher to slow down that growth before it yields rapid inflation and other consequences. This is why the Federal Reserve is planning to increase rates right now. With the pandemic’s economic strain in steady decline and both housing prices and inflation increasing rapidly, interest rate hikes are needed to stabilize the economy and avoid future instability.

 

What types of financial products are affected by interest rate decisions?

While interest rate hikes are likely to affect many financial products in the same or similar ways, it’s helpful to understand how those rate hikes will affect your financial plans.

 

Here are some of the most commonly sought loans and other financial tools and what changes you can expect them to experience as a result of interest rate hikes:

  • Mortgage: The interest rates available for both primary mortgages and home equity loans will rise as the Federal Reserve increases interest rates. Although the increase in interest may be nominal when compared to your mortgage payment, the cost over the repayment for a 30-year mortgage could be thousands of dollars.
  • Savings accounts and money market accounts: Interest-bearing accounts stand to benefit positively from interest rate increases. As the borrowing rate between banks rises, those institutions will inevitably increase the rate for interest-bearing accounts, giving you greater incentive to keep money in those accounts.
  • Certificates of deposit: Similar to savings accounts, you’re likely to see CD rates — and their earning potential — increase with rising rates.
  • Credit cards: Although credit card rates are already high, these rates are also variable and will likely increase as federal rates rise.
  • Stock investments: At least in the short term, federal rate increases may suppress the value of your stock prices. But rate increases are also the sign of a strong economy, and economic strength and growth also support higher stock valuations. If rate increases slow down inflation, this could further support stock valuations by preserving the value of your invested money.
  • Other loan products: Rate increases will inevitably increase the baseline interest rates you can expect to receive on personal loans and other types of financial products.

Eager to open new loans and other financial products to beat — or capitalize on — potential rate increases? As a member of your local credit union, you can take advantage of the potentially lower rates offered by a not-for-profit financial institution. 


Not a member? Open a checking account today.

 

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