The Federal Reserve has been raising rates to tame inflation, cool an overheated economy and slow the pace of global growth. But when the Fed hikes interest rates, it has a ripple effect that touches every sector of the economy and can make winners and losers change places.
The primary way the Federal Reserve affects our everyday lives is by changing the federal funds rate, which is the benchmark for what banks charge each other to borrow money. When the Fed raises or lowers that number, it directly impacts everything from mortgages and credit card interest charges to stock prices, investment returns and even job hiring.
Rate hikes are generally good for savers, who earn more APY (Annual Percentage Yield) on their savings accounts and money market accounts. However, they also mean that credit cards, home equity lines of credit and adjustable-rate student loans will cost more to service.
A rate-hike cycle also tends to slow the pace of new investments, especially those that are capital intensive. This can make companies and entrepreneurs think twice about expanding, or put a plan for a new product on hold.
It can also take time for higher rates to “bake in,” which is why it’s important for consumers to be proactive and prepare for future increases. That’s why it’s a good idea to pay off high-interest debt now while rates are still low, and to start building an emergency fund. And it’s also a great time to consider refinancing your current mortgage or student loan to lock in a fixed-rate that won’t rise as quickly when rates do.
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