The Impact of Interest Rate Changes by the Federal Reserve

As anticipated, the Federal Reserve has continued to increase the interest rates associated with borrowing and saving money to combat inflation. As a part of the series of rate hikes that has been happening, you may be wondering, what exactly does this mean for my finances? 
 
Why is the Fed raising rates? 
The federal funds rate is a key borrowing benchmark that influences everything from auto loans and credit card rates to yields on certificates of deposits (CDs) and savings accounts. The federal funds rate is the mechanism that the Federal Reserve Bank uses to control economic growth by either encouraging or discouraging spending. When the economy slows, the Fed may choose to lower interest rates, as they did a few years ago. This action may cause businesses to invest and hire more, and it encourages consumers to spend more freely, helping to propel economic growth. On the other hand, when the economy is growing too fast, the Fed may decide to hike rates, causing employers and consumers to stop or slow down on some financial decisions like we are starting to see.
 
“The Fed is hoping to control demand and tamper down inflation through this series of rate hikes, which might hurt in the short-term but will bring stability in the long-term,” said Robert Sousa, Director of Asset & Liability Management.

Inflation has been running much higher than expected, and the planned rate increases hopefully will help to bring stability to prices for goods and services that have been rising at a dramatic pace. The economy has been through a lot over the past two years, but inflation must come down.
 
Let’s take a look at how these rate changes can impact financial products:
The simple answer is that rising interest rates may not be favorable for borrowers, who may pay higher costs for loans. But, the silver lining is that it can be good for savers because their accounts will yield more interest.
 
Savings/ CDs: Calling all the savers! When rates go up, you typically benefit from the higher yields. But when the Fed decides to lower rates, you may take a hit. Think about your long-term needs and financial goals to determine what is best for you. 
 
Home Equity Line of Credit: Most HELOCs are offered with a fixed rate for a given period that then turns over to a variable. Check with your bank to help you plan for any potential changes in your interest rate.  
 
Mortgage Loans: As rates move up, it will be more expensive to get a new mortgage loan. Try to lock in a fixed mortgage rate sooner rather than later. If you think about refinancing, now is the time since rates will only continue to climb until the Fed decides to lower them again. Remember, if you have an Adjustable Rate Mortgage (ARM), be sure to check the next adjustment date on your rate so you’re not caught off guard.
 
Investments: With investments, it’s important to keep a long-term mindset. Try to avoid acting on impulse. If you need help with your financial strategies reach out to an experienced advisor, like the ones at Middlesex Financial Group.
 
Credit Cards: Most credit cards charge a variable interest rate based on the prime rate, which is linked to the federal funds rate. You can anticipate rates on credit cards to climb this year. Paying interest on those credit cards could start getting more expensive. If you’re not able to pay off your balance every month, try to pull back on your credit card spending. You should also review your statements to understand the interest rate being charged, and possibly look for lower rate options while being mindful of what the interest rate will be once any applicable low-rate promotional periods ends.
 
All in all, you should also keep an eye on your applicable products’ APY, which is the actual rate of return that accounts for compounded interest and APR, which is a regulatory calculation to show the cost of borrowing money
 
The importance of saving for the long haul
With this information in mind, it proves the value of establishing good savings habits. In a rising rate environment, boosting your credit score, paying off high-cost debt, or refinancing to a lower rate can create more breathing room in your budget.
 
If you’re looking for assistance with your financial goals, Middlesex Savings Bank is here to help. Contact us or stop by a local branch to talk about how we can help improve your financial wellbeing.