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What Fed Rate Hikes Mean for Your Money

Key short-term rate hits 5.25 percent

spinner image The Federal Reserve building in Washington, D.C., looking up at the eagle statue on top.
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The Federal Reserve, undeterred by a string of recent bank failures, on Wednesday raised its key interest rate by 0.25 percent, to a range of 5 to 5.25 percent, the tenth in a steady string of increases starting in January 2022. It did, however, hint that the current series of rate hikes could be paused, at least for now.

“The Fed is stuck between a rock and a hard place,” says Sam Stovall, chief investment strategist at CFRA Research. Inflation remains stubbornly high, yet a series of additional rate hikes may topple a teetering banking system. “By hinting that a pause may be appropriate, since the banking crisis should aid in slowing inflation through the curtailing of lending activity, the Fed may still be able to maintain pressure on inflation without overdoing its rate-tightening stance.”

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Why rates are rising

At the start of the pandemic in 2020, the economy plunged into a brief, sharp recession. The Fed, whose job is to fight inflation and keep the economy growing, slashed its key short-term fed funds rate to near zero to stimulate growth and revive the economy.

But inflation spiked to 8.9 percent in June 2022, boosted by low rates, pent-up demand, supply chain disruptions and, more recently, soaring oil prices caused by Russia’s invasion of Ukraine. To slow the economy and reduce inflation, the Fed began raising interest rates in March 2022.

The Fed’s campaign reduced inflation but didn’t kill it. In March, consumer prices rose 5 percent from a year earlier — down from June’s 41-year high but still well above average. The nation’s jobless rate fell to 3.5 percent, moving the job market closer to the Fed’s goal of maximum employment.

The Fed’s actions may have had an unintended consequence: Two regional banks, Silicon Valley Bank and Signature Bank collapsed in March, partly because of losses from the effect of higher rates on their investments. A third bank, First Republic, collapsed May 1, even after a coalition of banks infused it with cash.

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.

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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 "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.



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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. 

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