If you’ve ever taken out a mortgage, used a credit card or even put money into a savings account, you’ll feel the effects of an interest rate hike. The Federal Reserve, the nation’s central bank, raises or lowers interest rates to manage economic growth and inflation. It’s a complicated task, and predictions are often wrong, but the Fed’s interest rate changes have massive ripple effects throughout our economy.
When the Fed lowers its key interest rate, called the federal funds rate, it makes borrowing money cheaper for banks and consumers. The lower cost stimulates the economy by encouraging businesses to invest in projects and hire employees. Consumers then have more money to spend, and it should help lower unemployment levels.
On the other hand, if the Fed is concerned about inflation, it can raise the federal funds rate to make it more expensive to borrow money. In theory, this will slow down price increases and reduce the chance of a recession.
The Federal Reserve’s latest interest rate increase was part of the Fed’s response to surging inflation that has reached a four-decade high. In addition to the rate hike, the Fed announced plans to shrink its bloated asset portfolio.
What do these rate hikes mean for you? As with most things, it depends on your individual situation. But a general rule of thumb is that higher interest rates are bad news for people in their 30s because they have mortgages, car loans and other debt payments tied to rising interest rates. A 30-something can also expect the value of their house to decline faster during a time of high interest rates, according to a model from researchers at Harvard and Yale universities.