How The Federal Reserve and Higher Interests Rates Will Impact You

For the first time in three years, interest rates are almost certainly going up this month.

The Federal Reserve is likely to raise its benchmark interest rate by 0.25 percent next week in order to combat rising inflation, which is at a 40-year high. More raises are expected later this year.

Financial advisors predict that the policy’s impact on American households will be felt in a variety of ways, both favorable and negative.

“The Fed raising rates touches pretty much every single corner of the economy,” said Andy Baxley, a certified financial planner at The Planning Center in Chicago.

Loans

Borrowers will pay more for their loans if interest rates rise. Mortgages, student loans, vehicle loans, credit cards, margin loans on investment accounts, and other sorts of debt are all examples of this.

“The higher rates go, it’s harder and harder to be a borrower,” Baxley said.

Let’s imagine a consumer wants to buy a $500,000 home and takes out a $400,000 30-year fixed-rate mortgage. With a 4 percent mortgage rate versus a 3 percent mortgage rate, they would pay nearly $80,000 more over the loan’s life and about $200 more each month, according to Baxley.

According to Cathy Curtis, CFP, founder of Curtis Financial Planning in Oakland, California, income criteria and down payments rise with mortgage rates, so new house buyers should speed up their search to avoid being priced out of the market.

Consumers looking for a new automobile should speed up the process to avoid higher-interest car loans, according to Curtis. She also mentioned that now might be a good time for investors who have margin loans on their brokerage accounts to focus on paying them off.

Borrowers with variable interest rates should consider refinancing to a fixed rate or attempt to pay off their debt faster.

However, prospective homeowners should be in a strong financial position to buy real estate.

“Rushing to save money by buying could result in you ending up in financial hardship, which could be much more expensive in the long run,” according to Lauryn Williams, CFP, founder of Worth Winning in Dallas.

Higher mortgage rates, on the other hand, may help to temper a hot housing market and bring home values back down to earth, she said.

Investments

According to financial gurus, higher interest rates will put downward pressure on growth stocks. Such stock is issued by companies that have the potential to grow at an above-average rates relative to the broader market.

When financing rates are low, these companies (the classic ones being the huge technology corporations) prosper because they can invest more cheaply in innovative projects, according to Baxley.

“It could be a rough road ahead for growth stocks,” he said.

Due to the high returns in that part of their portfolio, investors may unwittingly be overweight in growth stocks. They should invest more in value equities, with the simplest option being to buy a value-focused mutual fund or exchange-traded fund, according to Curtis.

In the short run, bonds are also likely to lose money. Bond prices move in the opposite direction of interest rates.

The dynamic is more pronounced for bond funds with a long duration (those with bonds maturing in 10 years vs. 1 year, for example), advisors said.

“If you have to pay for college or buy a house in a year, you shouldn’t be thinking, ‘I can’t lose money in bonds,’” said Ted Jenkin, CFP, co-founder of oXYGen Financial in Atlanta.

Higher interest rates, on the other hand, result in higher returns for bond holders in the long run since new bonds are issued at higher yields that correspond to prevailing interest rates.

Savings

According to a Bankrate study conducted on March 2, the national average interest rate for savings accounts is a paltry 0.06 percent.

However, if the Federal Reserve moves, consumers will certainly notice increased interest rates on their bank accounts. According to advisers, online banks that provide high-yield accounts pay higher rates than traditional banks.

Other savings accounts, such as certificates of deposit, would see their rates rise as well.

“It’s important to do some rate shopping if you’re trying to enjoy those gains,” Baxley said.

However, the benefits are unlikely to be immediate. According to Jenkin, banks typically take many months to a year to raise rates on savings accounts.

Inflation

The reason the U.S. central bank raises interest rates is to cool the economy to tame inflation.

If the policy has its desired effect, consumers should see recent rapid price increases for food, clothing, and other goods and services begin to moderate.

Higher borrowing costs cause this knock-on effect. More expensive finance means less investment from individuals and firms, which reduces demand and lowers prices.

Jobs & Wages

Lower demand, on the other hand, may have an impact on jobs and salaries in particular sectors of the economy, according to Baxley.

In recent months, record job postings and rapid wage growth have resulted from high demand for workers and a limited supply of labor.

“I think people have gotten used to it being the first worker-friendly hiring climate in a while. That dynamic may shift with higher interest rates,” Baxley said.

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