Here’s what the Federal Reserve’s back-to-back 75-basis point interest rate hikes mean for you

The Federal Reserve raised the target federal funds rate by another 0.75 percentage points at the end of its two-day meeting Wednesday, in an effort to curb unrelenting inflation.

Fed officials have already raised benchmark short-term borrowing rates 1.5 percentage points this year, including June’s 75-basis point increase, which marked the largest increase in nearly three decades.

The central bank has indicated even more increases are coming until inflation shows clear signs of a pullback.

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The surging cost of living has already taken a toll on consumers, but rising interest rates come with their own set of opportunities and obstacles. 

The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

For starters, the rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many forms of consumer borrowing.

On the flipside, higher interest rates also mean savers will earn more money on their deposits.

Short-term borrowing rates will be among the first to jump.

“With the Federal Reserve raising interest rates at an unprecedented pace, variable rate debts such as credit cards and home equity lines of credit will be the biggest exposure,” said Greg McBride, chief financial analyst at Bankrate.com.

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, as well, and credit card rates follow suit.

Annual percentage rates are currently just over 17%, on average, but could be closer to 19% by the end of the year, which would be an all-time high, according to Ted Rossman, a senior industry analyst at CreditCards.com.

That means anyone who carries a balance on their credit card will soon have to shell out even more just to cover the interest charges.

As rates rise, the best thing you can do is pay down debt before larger interest payments drag you down.

If you’re carrying a balance, try calling your card issuer to ask for a lower rate, consolidate and pay off high-interest credit cards with a lower interest home equity loan or personal loan or switch to an interest-free balance transfer credit card.

“Zero-percent balance transfer offers can be a godsend for folks with credit card debt,” said Matt Schulz, chief credit analyst at LendingTree.

Adjustable-rate mortgages and home equity lines of credit are also pegged to the prime rate, but 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy. Still, anyone shopping for a new home has lost considerable purchasing power as rates almost doubled since the start of the year.

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning to buy a car, you’ll shell out more in the months ahead.

Federal student loan rates are also fixed, so most borrowers won’t be impacted immediately by a rate hike. But if you are about to borrow money for college, the interest rate on federal student loans taken out for the 2022-2023 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-2021.

If you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates — which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

The good news is that the interest rates on savings accounts are finally higher after several consecutive rate hikes.

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate and the savings account rates at some of the largest retail banks, which were near rock bottom since the start of the pandemic, are currently up to 0.10%, on average.

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 1.75% to 2%, much higher than the average rate from a traditional, brick-and-mortar bank.

As the central bank continues its rate-hiking cycle, these yields will continue to rise, as well. Still, any money earning less than the rate of inflation loses purchasing power over time. 

“Savers are seeing better returns on savings accounts, money markets and certificates of deposit and additional rate hikes will sustain that momentum,” McBride said. “More importantly, inflation must come down in a substantial way for those higher savings returns to truly shine.”

Consumers should prepare for even higher interest rates in the coming months.

Even though the benchmark Fed funds rate is now back to where it was in July 2019, at the peak of the last cycle, inflation is still “running north of 9%,” McBride said. “We’re not at the finish line, and there will be more interest rate increases to come in the months ahead.”

Traders are betting the Fed will raise rates again at its next meeting in September and then again in November and December before possibly cutting rates in the spring, depending on the evolving economic conditions.

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