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Due to the rising inflation, the FED have to find ways to cool the market. One of the best tools it currently has is the interest rate – by interest rate increase. The FED has already started with the process in 2022, and
A rising fed fund usually benefits consumers with interest-bearing bank deposits.
This is because as the rate increases, the interest rates for savings accounts, certificates of deposit, and money-market accounts follow suit.
However, it is the banks that set how much increase to effect. You can check with your bank to see how much more you’ll be getting on your deposits or placements using the adjusted rates.
When the prime rate increases, it directly pushes the money market and credit deposit rates.
Theoretically, an increase in deposit rates should move consumers and businesses to save more because they can get more interest income.
However, it could do the opposite since those with an outstanding credit card, home loan, or other debts would try to pay off their financial obligations to lessen the burden of increased credit rates.
3. Student Loans
In the United States, student loan debt stands at around $1.48 trillion spread out to more than 44 million borrowers.
If you’ve borrowed a student loan from federal funds, the good news is, the Fed rate hike will not affect the fixed rate of your loan.
But, if you take out a new fixed-rate federal student loan or the loan that you took charges variable rates, there is a high chance that you will be paying much more.
The higher rates may take effect soon because the government resets the rate it charges on new federal loans, fixed-rate and variable, every July.
If you took a private student loan with a variable rate, prepare yourself for an interest rate hike.
In times of accelerating rates, you can avoid paying more by refinancing your loan, so you can lock in on a more affordable fixed rate.
4. Credit Cards
Nearly every credit card has a variable rate, which lenders benchmark to the Fed rate. As the Fed rate goes up, expect the cardholders to experience the crunch.
Any time the Fed raises the benchmark rate, banks immediately follow by pushing their prime rates up and, since they use this to set many consumer rates, they all go up as well – including credit card rates.
So, it’s good to check your bank and see if they are raising their prime rate because they might be charging more for credit card balances.
Don’t forget that credit card issuers compound the interest so that magnifies the effect and you tend to pay more in the long run. This means that you begin to pay interest on your actual fund usage plus interest on the interest that you owe.
Or grab a balance transfer promo offer and insulate yourself from additional rate hikes.
But watch out for the fees and terms. Those credit card companies don’t give away things for free – there might be some charges and fees that they’ve hidden somewhere in the fine print.
Based on a survey by CreditCards.com, the national average credit card rate stood at 17.57%. Americans who held bad credit cards were charged the highest interest rate of 24.99%, while the credit card for low interest enjoyed lower rates at 14.61%.
5. Stock Prices (businesses profit)
When interest rates climb, stock prices descend partly because the higher cost of loans tends to eat into corporate profits and investors have less money to use for investment.
Higher interest rates might hinder business growth in general and slow growth mean lower profitability, which in turn, cause stock prices to fall. Only banks and other lending institutions directly benefit from interest rates hike by increasing their profitability.
The more the Feds raise their rates, the more likely the banks gain profits. It’s because banks raise their lending rates much faster than their deposit rates, thereby widening the spread between the two and generating more income.
They source funds at a very low rate (thru deposits) and lend them out at a much higher rate (thru consumer and commercial loans) – this is a basic banking concept.
6. Home Equity Line of Credit (HELOC)
If you have a mortgage, you can apply for a Home Equity Line Of Credit (HELOC) if you have increased your equity by paying off a substantial portion of your loan or if your property has increased in value.
You can then draw from the line of credit to get funds to renovate or upgrade your home.
But take note that HELOC rates behave the same way as auto loans: they closely follow the movement of the prime rate, which follows the movement of the federal funds rate.
If the Federal Reserve steps up the target rate, then you can be sure that HELOC will follow. This is why you should monitor what the Fed announces with its federal fund's target rate.
If you have a variable HELOC, you can well end up paying higher monthly payments in the coming months should the Fed funds’ target rate keep going up.
7. Personal Loans
You may have heard that the rates for personal loans are already clambering up in anticipation of the Fed rate’s impending hike.
The good thing is that personal loans are short to medium term loans, so there’s ample time for borrowers to
You may wonder if the Fed has any impact on wages at all. Well, it does, but a little indirectly as the job market tries to increase employment rates.
When the Fed moves the federal rate up, it usually slows down the economy.
A slow economy means fewer jobs are available, therefore less and fewer people find work, and it creates more justification for employers to hold back on giving salary increases.
It is a common misconception that the U.S. Federal Reserve dictates all interest rates in the market. The truth is, the Fed only controls one rate, and that is the federal fund rate. This is the rate that depository institutions charge other banks for overnight loans.
However, that rate causes all other rates, both borrowing and lending, to sway accordingly directly or indirectly across the economy – from credit cards to mortgages, all the way to the federal debt.
The Fed will strategically raise the fed funds rate to control the pace of economic activity so that inflation does not go insanely wild.