How the Fed's Rate Hikes Will Affect Your Finances

“Let’s face it: Low yields have been great for people who want to borrow, but low interest rates have been pretty painful for savers,” says Warren Pierson, managing director and co-chief investment officer at money management firm Baird Advisors.

Some of the pain that savers have suffered will subside as the Fed pushes rates higher. “Retirees tend to benefit when rates move up,” says Gary Schlossberg, global strategist for Wells Fargo Investment Institute.

Still, savers shouldn’t expect a lottery-like windfall overnight. Rates are seen moving higher in 2022, 2023 and 2024 to about 3 percent, but they’re starting from such a low base that the gains savers see on cash sitting in money market accounts and CDs will be modest. A $10,000, 12-month CD, for example, that a year from now might pay closer to 2 percent interest, still would generate only $200 in interest each year. And if inflation remains elevated, the returns on your savings still won’t keep pace with the rise in prices for things you buy such as food, gas and furniture.

Don’t expect the nation’s biggest banks to quickly boost the interest they pay on cash each time the nation’s central bank raises rates, says Greg McBride, chief financial analyst at Bankrate.com. “Yields on savings accounts and CDs have been on the rise and the increases will gain momentum this summer with repeated aggressive rate hikes from the Federal Reserve — but only if you’re looking in the right place,” McBride says. "Many banks, particularly larger banks, are sitting on a pile of deposits and will be very stingy about increasing payouts, but online banks, community banks and credit unions are raising rates. Put your money where it will be welcomed with open arms and higher yields.”

Borrowers, beware: Costs are going up

If you borrow money, your interest costs will rise on things tied to the Fed’s key rate, such as adjustable-rate mortgages (ARMs), home equity lines of credit (HELOCs), auto loans and credit cards. Thirty-year fixed-rate mortgage rates have already risen to 5.23 percent from 3.11 percent at the end of 2021, according to mortgage giant Freddie Mac. The new Fed hike could put mortgage rates above 6 percent.  “All of those things you borrow money to buy will cost more,” says Bill Schwartz, managing director at Wealthspire Advisors. One way to offset the hit to your wallet from higher rates is to make sure your credit score is as high as it can be, as banks and credit card companies offer lower rates to lower-risk customers with high credit scores.

And if you are carrying debt on credit cards, expect to pay more in interest, too. “Higher rates are just another form of inflation,” says Bankrate’s McBride. “It eats into disposable income, and paying down debt requires more work.” But there are ways to avoid paying more in interest even as the Fed moves further along in its rate-tightening cycle. If you have a credit card, for example, the best way to keep a lid on interest costs is to pay your debt down as soon as possible, says Ross Mayfield, investment strategy analyst at Baird. Taking advantage of a zero percent balance transfer offer can also make it easier to pay down high-interest debt.

If you have an ARM or a HELOC, mortgage products whose interest rates move higher in lockstep with Fed rate increases, it might make sense to lock into a lower fixed-rate mortgage now before the Fed’s next rate hike, says McBride.

Rate increases, as it turns out, are not the end of the world. And it’s important to keep the news about the Fed’s pivot to higher rates in perspective, says Andy Smith, executive director of financial planning at Edelman Financial Engines. “Try to make sure that [you] are coming into it in the right way and remove as much emotion from it as possible,” Smith says. That means making tweaks here and there to either take advantage of higher savings rates or reduce your borrowing costs, but keeping your long-term investment portfolio, which should include both stocks and bonds, on autopilot. 

Adam Shell is a freelance journalist whose career spans work as a financial market reporter at USA Today and Investor’s Business Daily and an associate editor and writer at Kiplinger’s Personal Finance magazine.