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On December 14, the Federal Open Market Committee (FOMC) announced another rate hike, raising the federal funds rate by 50 basis points, to a range of 4.25% to 4.5%.
This move follows 75 basis point hikes in June, July, September and November, and two smaller rate hikes at the March and May meetings—all part of the central bank’s strategy to fight stubbornly high inflation. It was the committee’s last meeting of 2022.
Though the committee noted the strong labor market, it cited continued imbalance between supply and demand and the ongoing war in Ukraine as motivations to raise rates.
“The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the FOMC said in a statement.
The latest personal consumption expenditures price index (PCE) report showed that prices across the economy have risen 6% over the prior 12 months.
Unfortunately for stretched consumers, inflation can take a long time to return to normal, and it takes several months for the Fed’s policy changes to work their way through the economy. However, it’s worth noting that some financial effects of its policies, such as higher interest rates on borrowed money, can be felt more quickly.
3 Ways the Fed Rate Increase Can Affect Your Money
1. Credit Card Interest Becomes More Expensive
When the Fed raises interest rates, your credit card debt becomes more expensive. That’s because the interest rates on consumer debt—like a credit card balance—tend to move in lockstep with the federal funds rate.
This key interest rate impacts how much commercial banks charge each other for short-term loans. A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.
The banks pass on these higher borrowing costs by raising the rates they charge for consumer loans. Most credit card issuers set your APR based on the prime rate, which is the rate banks charge the least-risky customers for loans, plus a percentage on top of that to cover operating costs and make a profit.
But most APRs are variable, meaning the interest rate you agree to pay when approved for a new card can fluctuate based on the prime rate. So if your credit card APR is 18.15% and the Fed increased its federal funds rate by 75 basis points, your issuer would likely raise your APR to 18.90%.
The higher the interest rate that’s applied to your credit card balance, the more expensive it is to carry that debt. Consider paying your debt down as much as possible or take advantage of a 0% APR balance transfer card to help reduce how much extra money you’ll pay on your debt.
Read more: Compare the Best Balance Transfer Cards
2. Mortgages Become Costlier
Another Fed rate hike means those borrowing to buy a house or tapping their current home equity will likely face a bigger housing bill in the coming months.
Earlier this year, some economists had forecast that rates would hit their peak in the summer. The 30-year fixed mortgage reached 5.81% in mid-June, and economists were predicting rates would land in the low 5% by year-end.
But as the economy became increasingly uncertain and the Fed continued its aggressive rate-hike campaign, mortgage rates hit a new 20-year high of 7.08% in mid-November, surpassing most predictions for the year.
Rates for home loans have cooled off a bit since then, landing at a 6.33% average for the week ending December 8, according to Freddie Mac.
Mortgage rates are directly impacted by the bond market, which often reacts to the Fed’s actions.
The Fed’s 2022 rate hikes were one factor driving mortgage rates up earlier in 2022, while strong investor demand for mortgage bonds has aided the more recent decline in rates. That’s because the economy appears more stable, while Fed rate hikes—especially when they’re smaller—no longer come as a shock.
Read more: Compare Current Mortgage Rates
However, shorter-term home loans with floating rates like adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs) are directly tied to the Fed funds rate. This means when that rate goes up, ARM and HELOC rates soon follow.
Even as mortgage rates remain high compared to the rock-bottom rates of 2021, not everyone thinks higher mortgage rates are a terrible thing. Some real estate professionals see higher rates as one way to cool an overheated housing market. Others think it’s time to get back to normalcy after years of low borrowing costs.
“We’ve had a wonderful run,” says Wendy Papasan, a Keller Williams realtor in Austin, Texas, who bought her home 20 years ago at an interest rate of 7.25%. “Industry professionals have been predicting a downturn for several years now and guess what? It happened.”
Papasan says she doesn’t see interest rates going down for at least 18 months, and that’s assuming inflation drops.
“Timing the market is impossible,” she says. “The best time to purchase a home is when you need a home.”
For shoppers in the market to buy now, housing experts say borrowers should consider locking in the best interest rate since rates can climb even by the hour. Rate locks typically last for at least 30 days, but some lenders offer longer locks, usually for a fee.
It’s difficult to predict for certain whether you have locked in the lowest rate possible, but there’s always the option of refinancing later if rates decline.
3. Rates on Savings Accounts Climb, Though Slowly
A higher federal funds rate is a boon to savers, who have been seeing the rates on savings accounts creep higher.
There’s no direct connection between federal funds and deposit rates, but banks are steadily increasing the annual percentage yields (APYs) they pay on deposit accounts—including savings accounts, money market accounts and certificates of deposit (CDs).
Financial institutions raise their rates to attract deposits, but they currently have plenty of cash on hand and can take their time hiking yields.
How quickly you’ll see higher APYs on deposits depends on where you bank. Online banks, smaller banks and credit unions typically offer more attractive yields than big banks, and they’ve generally increased rates faster in recent months due to the increased competition for deposits.
Putting your money into an online bank or credit union may be your best bet if you’re looking for a higher yield. While the national average rate on a savings account has jumped from 0.06% to 0.24% since January, according to the FDIC, the best high-yield savings accounts pay up to 5% APY on some deposits.
Where you park your cash matters, especially during times of increasing inflation.
