An interest rate hike is one way the Federal Reserve tries to control soaring inflation. But it can also impact your bank accounts, credit cards and mortgage.
The Fed’s target interest rate — the central bank’s benchmark target for its lending and borrowing activities — is set by its Federal Open Market Committee. The FOMC meets every three months and, each time it puts out projections of where it expects the federal funds rate to go in the future, people pay attention. This is because the EFFR’s end rate determines consumer borrowing and saving rates, as well as the value of your retirement savings in the form of certificates of deposit or high-yielding savings accounts.
When the Fed increases its target rate, it sends the message that borrowing costs will be higher, which can reduce demand for goods and services, ultimately leading to lower prices and less inflation. That’s why the financial markets largely cheered the Fed’s decision to raise its target rate.
But the rate hike will have a different impact on individual consumers, depending on their current and anticipated debt levels. For those with student loans, auto or home loans, for example, higher rates will mean bigger monthly payments. But the effect will vary by borrower, as many student loan interest rates are fixed, while mortgage rates tend to fluctuate in line with the yield on domestic 10-year Treasury bonds.