The Federal Reserve is not expected to raise the federal funds rate after its meeting this Thursday, meaning the benchmark rate would continue to sit in a range of between 0% and 0.25%.
But many experts expect the Fed will hike the federal funds rate at its next meeting in March. And forecasts are anticipating additional rate increases before 2022 is done.
So, now is the time to prepare for higher interest rates. Whenever the Fed raises rates, some Americans benefit while others get an ache in their wallet.
Here are a few ways that Fed rate hikes can affect your costs and some suggestions for making the best of your situation ahead of the likely rise in rates.
1. Your mortgage costs might increase
If you are looking for a mortgage — or even if you already have one — your monthly expenses might be higher if the Federal Reserve hikes the federal funds rate.
As we explained when the last round of rate hikes began, mortgage rates do not move in lockstep with the federal funds rate:
“If you are shopping for a fixed-rate mortgage, don’t expect drastic changes. Fixed-rate mortgages are not directly tied to the federal funds rate.”
However, although there is no direct relationship between the two, rates on fixed-rate mortgages are likely to move higher over time as the federal funds rate increases.
The effect of a rising federal funds rate could be more direct if you have an adjustable-rate mortgage, which means your mortgage rate changes periodically. In that case, you can fully expect your monthly mortgage costs to increase steadily as the Fed hikes rates.
Mortgage rates have been moving higher recently, and that trend may well continue. So, the time to lock in a good rate is likely right now. Go to Money Talks News’ Solutions Center to search for a great rate on a mortgage refinance.
For more advice, check out “How to Refinance Your Home Loan.”
2. Credit card borrowing will become more expensive
If you have credit card debt, prepare for the impact on your finances to worsen. Credit card borrowing costs usually rise when the Federal Reserve hikes rates.
That’s because the rates tied to these borrowing tools are variable and go up and down along with interest rate trends as a whole.
In recent years, you’ve probably gotten used to borrowing very inexpensively. But it appears those days are coming to an end.
If you need help paying off your debt before rates rise, stop by Money Talks News' Solutions Center to learn how to find a reputable credit counselor.
To learn about another route out of debt, check out “Here’s How to Stop Paying Credit Card Interest.”
3. HELOC costs will climb
As with credit cards, the cost to borrow through a home equity line of credit, or HELOC, likely will increase once the Fed hikes its benchmark rate. That is because lenders are likely to hike the variable rate attached to a HELOC.
4. Auto loans will become costlier
Just about every borrowing cost increases as interest rates rise, and auto loans are no exception. Rates on such loans are likely headed north, so if you plan to buy a new car, your monthly payment may well be higher.
A less-affordable auto loan just adds insult to injury in a world where new and used car prices also are spiraling higher.
5. Stock returns may sag
It is impossible to know where the stock market is headed. Even if the Fed hikes rates several times in 2022, investors in stocks could still enjoy rip-roarin’ returns this year.
Or maybe not. Historically, higher interest rates often have had a cooling effect on stocks. Forbes explains why:
“When Fed rate hikes make borrowing money more expensive, the cost of doing business rises for public (and private) companies. Over time, higher costs and less business could mean lower revenues and earnings for public firms, potentially impacting their growth rate and their stock values.”
Again, there is no guarantee that higher rates will translate into stalled stock returns. But it’s best to prepare for that possibility.
6. The value of your existing bonds will fall
If you are holding bonds, their value will fall as rates rise. That is because there is an inverse relationship between the price of a bond and its yield.
In essence, the value of existing bonds decreases because new bonds that come to market will soon offer higher interest rates.
7. You might earn more money in your savings account
So far, we’ve looked at the negative effects of an interest rate hike. But it’s not all gloom and doom.
When the Fed hikes rates, the rates on savings accounts are likely to move higher as well. That means you’ll earn a higher return on your savings.
It’s worth comparing rates on savings accounts in the weeks and months after a Federal Reserve rate hike. You can search for a savings account with a great rate in Money Talks News’ Solutions Center.
8. CD rates should improve
As with savings accounts, rates should get better on certificates of deposit, or CDs, when the Fed hikes its rates. That means if you are willing to lock up your cash for a while, you should be better compensated for doing so.
For more tips on investing in times like these, check out Money Talks News founder Stacy Johnson’s podcast episode “The Best Investments for Rising Interest Rates.”