What to expect as the Federal Reserve (the central bank of the United States) increases interest rates. How it impacts your budget, and your money. Understand why the Federal Reserve is increasing rates, so we all will see our borrowing costs potentially rise. Here are some ways that rate hikes could affect you, your money, and your monthly expenses. Learn how the rate increases will impact different types of borrowing including credit cards, student loans, auto loans, mortgages, and bank savings accounts. Here are the implications of the Fed’s rate increase for students, homeowners, savers, and borrowers.
Use this video lesson on the topic to discuss the terminology and basic economic and related concepts of
- Interest Rates
- Federal Reserve
- Debt and Credit
- Budgeting and Monthly Expenses
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about interest rates and how they are currently increasing. Discuss how rising interest rates will impact them and their family’s finances. Review the questions on the worksheet.
What does the interest rate increase mean for you?
Interest rates are increasing. The Federal Reserve, the central bank, is increasing rates, so we all will see our borrowing costs potentially rise. Here are some ways that this could affect you and your monthly expenses.
So what exactly is happening?
The federal funds interest rate is the rate at which banks lend and borrow to each other overnight. It is set by central bank. The Fed’s actions have an impact on the savings and borrowing rates consumers see every day, even though it isn’t the rate they pay. When the Fed raises its benchmark rate, rates on savings accounts, credit cards and other types of loans change. Changes in the benchmark rate of Federal Reserve have ripple effects on all aspects of credit, from student loans to home mortgages, to credit cards.
Why are interest rates rising?
The Federal Reserve is raising rates to try and control inflation, which has reached a multi-year high. As the Fed raises its federal funds rate, borrowing costs rise, whether directly or in indirect ways. This should slow down the demand for goods and services and reduce inflation. Here is how the rate increases will impact different types of borrowing, debt and credit.
The rates of short-term borrowing, especially on credit cards, will rise quickly. Most credit cards have variable rates, which means that your APR, or interest charge, will rise in a billing cycle. Rate increases, no matter how small, are not good news for people with lots of credit card debt, so try to reduce any credit card debt you may have. If that is not something you can do, try to lower your rate or find a credit card that has a lower rate than the one you currently have.
The federal student loan rates are fixed so that most current borrowers won’t be affected by an increase in interest rates. Private loans, however, may have fixed rates or a variable rate . This means that borrowers who borrow more money will pay more interest. New federal student loan borrowers, however, will be impacted when they get new loans, and those new loans are priced to the new higher rates.
Auto loans are usually fixed, so your current rate won’t generally increase. While the Fed’s interest rate moves can affect car loans, other factors have a greater impact on the rate that borrowers pay. The prices of new and used cars have risen so dramatically in the last year that interest rates might seem an afterthought. These rates are expected to increase.
The economy and inflation have already caused long-term fixed mortgage rates to edge higher. Homeowners with adjustable-rate mortgages and home equity lines will be affected more than those without. Most ARMs are adjusted once per year while a home equity line or HELOC adjusts immediately.
The federal funds rate doesn’t directly affect mortgage rates. Instead, they typically track the yield of 10-year Treasury bonds. This is affected by many factors, including investors’ expectations about how the Fed will react to inflation. Inflation had already caused mortgage rates to rise, even though historically low.
Bank Savings accounts
You may have money in bank accounts. However, whether rates rise translate into higher yields depends on which type of account you have. A Fed benchmark increase often means that banks will pay higher interest on deposits, but not always immediately. Even so, rates remain quite low. However, the inflation rate is likely higher than any of these rates so money in bank savings accounts loses its purchasing power over time.
So be aware that interest rates are increasing, and be prepared to property manage your finances with the higher cost of borrowing.