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

On Jun 15, 2022

The Federal Reserve raised its target federal funds rate by 0.75 percentage points, the largest increase in nearly three decades, at the end of its two-day meeting Wednesday in an effort to quell runaway inflation.

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

The latest move is only one part of a rate-hiking cycle, which aims to crush inflation without tipping the economy into a recession, as some fear could happen. The Fed last raised rates by 75 basis points in November 1994.

“It had been 22 years since they raised rates by more than a quarter of a percentage point and now to be doing so at successive 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 relief from surging prices. It also comes at a cost.

What the federal funds rate means to you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

“We’re certainly going to see the cost of borrowing escalate relatively quickly,” Spatt said.

With the backdrop of rising rates and future economic uncertainty, there are specific steps consumers should be taking to stabilize their finances, McBride added — including paying down debt, especially costly credit card and other variable rate debt, and increasing savings.

Pay down high-rate debt

Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark, so short-term borrowing rates are already heading higher.

Credit card rates are currently 16.61%, on average, significantly higher than nearly every other consumer loan and may closer to 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 the APR on your credit card rises to 18.61% by the end of 2022, it will cost you another $832 in interest charges over the lifetime of the loan, assuming you made minimum payments on the average $5,525 balance, Rossman calculated.

If you’re carrying a balance, try consolidating and paying off high-interest credit cards with a lower interest home equity loan or personal loan or switch to an interest-free balance transfer credit card, he advised.

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

Because longer-term 15-year and 30-year mortgage rates are fixed…