What Fed Rate Hikes Mean for Your Money

The Fed’s course is to keep fighting inflation but also letting markets know that it will backstop the Federal Deposit Insurance Corp. (FDIC) if other banks fail. “It’s saying yes, we’re going to fight inflation, but at the same time, we are going to guarantee depositors’ money,” Stovall says.

A win for income-starved savers

Low rates helped the economy during the 2020 COVID-19 shutdown, but it punished savers, especially retirees who rely on safe, steady income. Yields on bank accounts and other safe, short-term investments fell to nearly zero.

No longer. Investors can get rates of 5 percent on some short-term Treasury bills, as well as one-year bank CDs. Those rates should increase after the most recent Fed rate hike.

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. "The nation’s biggest banks have done little to nothing to boost the interest they pay on cash each time the nation’s central bank raises rates," says McBride. “The largest banks are sitting on a pile of deposits and will continue to be very stingy about increasing payouts, but online banks, community banks and credit unions have been raising rates to very competitive levels. 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 mortgage rates have risen to 6.43 percent from 3.11 percent at the end of 2021, according to mortgage giant Freddie Mac.

The latest Fed hike could put mortgage rates close to 7 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.

You may be able to get lower rates with an adjustable-rate mortgage. An ARM that adjusts every five years has an initial 7.44 percent interest rate. If rates continue to move up, however, your payment will increase.

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, he says.

Rate increases, as it turns out, are not the end of the world. 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.