How the Fed Interest Rate Hikes Affect Your Wallet

The Federal Reserve has raised interest rates by 0.75% for the third month in a row, increasing the Federal Funds Rate to 3.25%. Just a year ago, the rate was only 0.25%, making this increase in rates one of the fastest in history.

But why?

As you probably notice, stuff is getting expensive, and inflation is still currently more than 8% year-over-year. When the cost of goods and services start to inflate at a fast pace, raising interest rates can help bring things back to normal by making borrowing more expensive, forcing people to cut back on spending.

Less spending equals less demand. And less demand translates into a more relaxed supply chain, which means lower prices for just about anything. 

But with inflation still too high, and the Fed increasing rates more than anticipated, a recession is now looming, which can have a major impact on your finances.

So what do these rate increases mean for your student loan, auto loan, credit card debt, savings, and IRA? And what about your job with all the talk of a recession coming? That’s what we’re here to answer.

If You Have Credit Card Debt…

Since most credit cards have a variable interest rate — meaning that it can fluctuate depending on market conditions — you will see those rates increasing as the Fed continues to ratchet rates up higher and higher.

Robert Humann, chief revenue officer at Credible, says that if you’re carrying a balance, your debt, as well as your monthly bill, will probably become more expensive in the following months.

That’s because most lenders use the federal funds rate as their guide to set their own interest rates.

“Generally, when that rate rises, you’ll see other interest rates increase, including credit card interest rates,” Humann says.

However, before raising interest rates, Humann says that your credit card company must give you a 45-day notice to let you know about these changes, so you can prepare your pocket for what’s coming.

“If you’re struggling with high-interest credit card debt, paying it off with a fixed-rate personal loan could save you money in the long run,” Humann says.

He makes an excellent point.

The current APR for new credit card offers is 21.59%, according to LendingTree’s latest report, while personal loans from lenders like LightStream can provide you with a fixed APR as low as 4.49%, depending on your credit.

You can also pay off your credit card debt faster and avoid further interest charges by using a balance transfer credit card.

Read more: Best Balance Transfer Credit Cards

Although you’ll need excellent credit to receive the 0% introductory offer, you can get anywhere from 12 to 21 months to pay off your balance, interest-free.

Bottom line: Credit card payments will continue increasing as the Fed hikes interest rates, but personal loans or balance transfer cards can help lower monthly payments.

If You Have Student Loans…

If you have federal student loans, rejoice (at least a little). The Fed’s interest rate hike won’t actually have any impact on your loans or how much you’ll be paying each month, as these loans have a fixed interest rate. So, you can rest easy.

In addition, Biden’s recent student loan forgiveness plan has forgiven up to $10,000 in loans for certain borrowers with federal loans.

The problem, however, is if you have private student loans with a variable interest rate. Unfortunately, just as with credit cards and other variable rate loans, rates are based on the federal funds rate. And as the Fed continues to increase rates at a historic pace, the rates (and monthly payments) will continue to increase.

To stop your payments from going even higher, you may want to consider refinancing your private student loans to a fixed-rate loan.

But refinancing your variable rate student loans only makes sense if your credit score and income have substantially improved since you first got the loan. Otherwise, you won’t be able to secure the best terms or rates available, and it won’t make any sense to go through the whole refinancing ordeal.

Bottom line: Fixed-rate student loans (federal or private) are fine, but variable-rate private student loans will continue to increase in the near future.

Read more: Should You Be Worried About Inflation If You Have Student Loans?

If You Have a Mortgage or Are Planning to Buy a House…

If you’re one of the lucky ones who already own their home with a fixed-rate mortgage, rising interest rates will have no negative impact on your monthly payment.

But if you have an adjustable-rate mortgageyou have probably noticed your payment going up this year — some can increase on a monthly basis as the Fed hikes rates. And this will continue through the rest of 2022, as Federal Reserve chairman, Jerome Powell, has reiterated his hawkish-stance on fighting inflation with rate increases.

While refinancing your mortgage is one way to lock in your rate and stop your payment from increasing, fixed 30-year mortgage rates are up over 6%, which can drastically increase your overall mortgage payment. Refinancing only makes sense if your credit and income have improved and you can secure a lower rate than the one you currently have. 

Related: Run the numbers with our Simple Mortgage Calculator.

If you’re on the hunt for a new home, Brendan McKay, president of Broker Advocacy at the Association of Independent Mortgage Experts, says the hike in interest rates “means that the home you will end up owning is going to be more expensive.”

McKay also points out that another drawback for prospective homeowners is that higher interest rates can also affect how much house they can afford.

“Most loan officers give pre-approvals for sales prices since that’s how people look for homes, but it’s all driven by a payment that you qualify for,” McKay says. “So, if you previously qualified for a $3,000 a month payment, your loan officer might have said you qualified for a $550K home, but now that $3,000 a month might only get you $500K.”

But there is some good news for prospective homebuyers. 

As mortgage rates continue to increase, this is slowing the demand on the housing market, causing price drops and even lower listing prices around the country. As a buyer, you may still have a higher payment than back when rates were around 3%, but prices are dropping, making your overall mortgage smaller than earlier this year.

Bottom line: Those with fixed-rate mortgages under 5% are in great shape right now. If you have a variable rate mortgage, expect to continue to see payment increases throughout 2022. And buyers will have a higher payment than before but might be able to save tens of thousands of dollars on overall prices.

If You Have an Auto Loan or Are Looking to Buy a Car…

Just like other fixed-rate lending products discussed on this list, if you already have an auto loan, you don’t need to worry about any changes in your APR or monthly payment.

Likewise, if you’re planning to buy a car, the rise in interest won’t substantially impact how much you’ll pay each month, as other factors influence the interest rate on an auto loan. These include your credit score, income, assets, debts, and whether you’re trying to finance a new or a used model.

You can get a quick estimate on how much your payment will be by using our Auto Loan Calculator and inputting your estimated car cost, down payment, interest rate, and trade-in value. If you adjust the estimated rate, you can quickly compare how different rates will affect your overall payment.

Bottom line: Interest rates are increasing, but auto loan rates are determined by far more factors than the federal funds rate. If you’re on the market for a new ride, the best way to save money is to compare offers before committing to one.

Read more: Car-Buying Guide: How to Buy a Car and Save Big on Your Ride

If You’re Job Hunting…

We are in interesting times regarding jobs. 

While the looming interest rate hikes typically cause a slowdown in hiring, and possibly even layoffs, we are still at historically low unemployment, and companies are still short-staffed.

So what is going to happen?

Jerome Powell recently stated that unemployment is expected to increase through the end of 2022, and stay higher over the next few years. This is due to aggressive rate hikes and a decrease in consumer demand.

So, yes, there will be job loss over the coming months and years.

But, the predicted unemployment rate is around 4.4%, which is only slightly higher than the current 3.7% unemployment rate. Add to that the current short-staffing at many retail businesses, and the impact on jobs may not be as significant as previous recessions.

Bottom line: There will be layoffs, and unemployment will increase. But if you are currently in the market for a new job, there is still demand for workers in many sectors.

Read more: 7 Tips to Protect Your Finances Against Inflation

What About Savings, Stocks, and Other Investments?

When it comes to your savings account, short-term CDs, and yields on cash investments, Amy Lynn Richardson, CFP with Schwab Intelligent Portfolios, says there’s good news as yields tend to rise in tandem with the federal funds rate. In fact, many high-yield savings accounts are now paying up to 2% APY (or more).

Read more: Best High-Yield Savings Accounts Compared

As far as other investments go, the stock (and bond) market is down in 2022, and a recession is looming. In fact, investors can expect more short-term volatility as rates continue to rise. The best course of action is to keep in mind that investing is more about long-term success than short-term wins.

“For most investors, the best approach to long-term success is broad diversification that aligns with their risk tolerance,” Richardson says. “This way, you are not putting all of your eggs in one basket.”

If you don’t know how to diversify your portfolio correctly, the best thing you can do is consult with a financial planner to develop an effective investment strategy. You can also invest using a robo-advisor, which can do all the heavy lifting for you at a reasonable cost.

Read more: The Best Robo-Advisors

Will the Fed Keep Hiking Interest Rates?

Unfortunately, yes.

At the beginning of 2022, the projected number of rate hikes was around six for the entire year. And the predicted average rate hike was around 0.25% to 0.50%. 

As of September 2022, we have already seen five rate hikes, with July, August, and September all seeing a 0.75% increase, far higher than previously expected. There are two more rate hikes projected, and these may be as high as 1.25% each.

In the Federal Reserve’s Summary of Economic Projections, Jerome Powell stated that the federal funds rate could go as high as 4.4% (currently at 3.25%), which is 1% higher than predicted back in June. Rates could even rise as high as 4.6% by the end of 2023.

Bottom line: The Fed has committed to increasing rates as inflation is still very high. Two more rate increases are expected by the end of 2022.

The Bottom Line

The Fed is unrelenting in its mission to tame inflation and is showing no signs of slowing down rate hikes. This will continue to increase interest rates on most financial products, which is bad news for loans, but great news for savings accounts.

The best thing you can do to protect your wallet is to cut down costs wherever possible, gravitate toward fixed-interest rate products if you need to borrow, and avoid variable rates.

Featured image: Andrii Yalanskyi/

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