That means the Fed’s highest rate hike in 28 years for you

The Federal Reserve hiked interest rates by 0.75 percentage points at the end of its two-day meeting on Wednesday, the largest hike in nearly three decades, in a bid to quell runaway inflation.

“The motivation for all of this is that prices are going up,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business. “The Fed is trying to combat this with higher interest rates to reduce demand.”

The latest move is just part of a cycle of rate hikes aimed at curbing inflation without plunging the economy into recession, as some might fear. The Fed last hiked rates by 75 basis points in November 1994.

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“It’s been 22 years since they’ve hiked interest rates by more than a quarter of a point, and now that they’re doing so at back-to-back meetings it really speaks to the urgency at hand.” said Greg McBride, chief financial analyst at Bankrate.com.

For consumers, this aggressive approach could eventually bring some relief from rising prices. It also has its price.

What the Federal Funds Rate means to you

The federal funds rate, set by the central bank, is the rate at which banks lend and borrow money from each other overnight. While that’s not the rate consumers are paying, the Fed’s moves are still impacting the lending and savings rates they see every day.

“We will certainly see borrowing costs escalate relatively quickly,” Spatt said.

Against a backdrop of rising interest rates and future economic uncertainty, consumers should be taking certain steps to stabilize their finances, McBride added — including paying down debt, particularly costly credit card and other adjustable-rate debt, and increasing savings.

Pay off high-interest debt

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark, so short-term lending rates are already rising.

Credit card rates currently average 16.61%, well above almost any other consumer loan and could approach 19% by the end of the year — which would be a new record, according to Ted Rossman, a senior industry analyst at CreditCards.com.

If your credit card’s APR rises to 18.61% by the end of 2022, that’ll cost you an additional $832 in interest expense over the life of the loan, assuming you’ve made minimum payments on the average balance of $5,525, Rossman calculated.

If you have a balance, try to consolidate and pay off high-yield credit cards with lower interest rates home loan or personal loans, or switching to an interest-free credit card with wire transfer, he advised.

Consumers with an adjustable-rate mortgage or home equity loans may also want to switch to a fixed-rate mortgage, Spatt said.

Because longer-term 15- and 30-year mortgage rates are fixed and linked to government bond yields and the broader economy, these homeowners will not be immediately hit by a rate hike.

However, the average interest rate on a 30-year fixed-rate mortgage is also rising, hitting 6.28% this week — more than three full percentage points from 3.11% at the end of December.

“Given that they’ve already risen so dramatically, it’s difficult to say how much mortgage rates will rise by the end of the year,” said Jacob Channel, senior economic analyst at LendingTree.

For a $300,000 loan, a 30-year fixed-rate mortgage at a 3.11% interest rate would cost you about $1,283 a month. Paying 6.28% instead would cost an additional $570 a month, or $6,840 a year, and an additional $205,319 over the life of the loan, according to Grow’s mortgage calculator.

Even though car loans are locked in, the payments are getting bigger because the prices of all cars are going up. So if you’re planning on financing a new car, you’ll be shelling out more in the coming months.

Federal student loan rates are also fixed, so most borrowers are not immediately affected by a rate hike. However, if you have a personal loan, those loans can be fixed or have a floating rate tied to Libor, Prime, or T-Bill interest rates — meaning borrowers are likely to pay more interest when the Fed hiked rates, although how much more will vary by benchmark.

As such, this is a particularly good time to identify your outstanding loans and see if refinancing makes sense.

Chase higher savings rates

While the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate. As a result, the savings account rate at some of the largest retail banks are just above the low point, currently averaging just 0.07%.

“The interest rates paid by bigger banks are pretty much flat, so where you have your savings is really important,” McBride said.

Thanks in part to lower overheads, the average interest rate for online savings accounts is closer to 1%, much higher than the average interest rate at a traditional bank.

“If you have money in a savings account that’s earning 0.05%, moving it to a savings account at 1% is an instant 20x increase, with more benefits added as interest rates rise,” says McBride.

Even better than a high-yield savings account are high-yield certificates of deposit, which pay out around 1.5%.

However, since the inflation rate is now higher than any of these rates, any savings lose purchasing power over time.

To that end, “one of the most important opportunities out there is the opportunity to buy some I-Bonds from the US government,” Spatt said.

These inflation-linked assets, which are backed by the federal government, are nearly risk-free and are paying an annual rate of 9.62% through October, the highest return on record.

Although there are purchase limits and you can’t tap into the money for at least a year, you’ll get a significantly better return than a savings account or annual CD.

What’s next for interest

Consumers should brace themselves for even higher interest rates in the coming months.

Although the Fed has hiked rates several times this year, more rate hikes are on the horizon as the central bank struggles to contain inflation.

While expectations for these hikes have been quarter and half point hikes at each session, the central bank could dish out more Increases of 50 or 75 basis points if inflation does not cool down.

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