If you opened the news this week, you probably saw some version of the headline: The Federal Reserve raised interest rates. Great. And your next thought may have been, “Okay... but what does that actually mean for me?”
The short answer is: it depends on whether you're borrowing, saving, or investing. On September 16, the Federal Reserve raised its benchmark federal funds rate by 0.25%, bringing its target range to 3.75%–4.00%. The Fed said inflation remains elevated and that the move is intended to help bring inflation back toward its 2% goal. So, let's translate the Fed's decision into something a little more useful: your household finances.
If You Have Credit Card Debt: Pay Attention
Higher interest rates generally aren't good news for people carrying balances on variable-rate debt, particularly credit cards. A quarter-point increase isn't going to suddenly transform your monthly payment, but it is another reminder of how expensive revolving debt can become. If you're carrying a balance from month to month, even small changes in interest costs can add up over time. If you have high-interest credit card debt, this may be a good time to revisit your repayment plan, especially before putting additional purchases on the card. And remember: your credit limit isn't your spending limit (bonus points if you’re thinking back to my recent blog on this topic).
If You Have Money in Savings: There's a Silver Lining
Higher rates can be good news for savers. Savings accounts, money market accounts, CDs and short-term Treasury securities can all offer more attractive yields when interest rates are higher. The catch? Your bank doesn't necessarily pass the entire rate increase along to you. That makes this a good time to check what you're actually earning on your cash. My bank, however, sent me a “good news your HYSA APY is increasing” email and I think that’s the first time I’ve ever enjoyed getting correspondence from them.
What About Your Mortgage?
Here's where things get a little confusing. The Fed does not directly set mortgage rates. If you already have a fixed-rate mortgage, a Fed rate increase doesn't change your interest rate or your principal-and-interest payment.
Mortgage rates are influenced by longer-term interest rates and expectations about the economy and inflation. Adjustable-rate mortgages are different because their rates can change according to the terms of the loan. So, if you're thinking about buying a home, refinancing, or taking out a loan, don't assume that a Fed announcement automatically tells you what your specific rate will be.
And What About Investments?
Interest rates can affect investments, but there's no simple “Fed raises rates, therefore stocks go down” formula. For bonds, rising rates can cause the market value of existing bonds to fall because newly issued bonds may offer higher yields. On the other hand, higher rates can mean better opportunities for investors putting in new money. Stocks can also be affected because higher borrowing costs can influence businesses and consumers. But stock prices are driven by many factors, including corporate earnings, economic growth, inflation and investor expectations. In other words, one Fed announcement isn't a reason to abandon a long-term investment strategy.
What Should You Actually Do?
The Federal Reserve controls monetary policy. You don't.
But you do control some of the decisions that matter to your financial life.
If you have high-interest debt, make a plan to pay it down.
If you have substantial cash savings, check whether you're earning a competitive rate.
If you have an adjustable-rate loan, understand how and when your rate can change.
If you're investing for the long term, remember why you invested in the first place and avoid making major changes based solely on one headline.
And if you're retired, don't forget that higher rates can have both benefits and drawbacks. You may earn more on cash and newly purchased fixed-income investments, while existing bonds and other investments can react differently to changing rates.
The Fed's decisions can certainly affect your finances, but they don't have to dictate your financial plan.
You can't control interest rates. You can control what you do with yours.
All the best,
Chandler