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Financial PlanningBlog posted On March 16, 2022
In 2008, the Federal Reserve lowered the benchmark interest rate to a level of near zero. This was the first time the benchmark rate had been this low. The second time was in March 2020. March 2022 will be only the second time that it has raised rates from near zero. So how will this jump affect you?
“The Fed raising rates touches pretty much every single corner of the economy,” said Andy Baxley, a certified financial planner at The Planning Center in Chicago.
Loans like student loans, auto loans, credit cards, certain mortgages, and other types of debt will likely become more costly with a rate hike. “The higher rates go, it’s harder and harder to be a borrower,” Baxley said. Borrowers with variable interest rates will face the largest costs. If you have a loan with a fixed interest rate, your rate will remain the same despite the Fed hikes. The rate hikes might also help cool off the hot housing market, bring home prices lower, and add some supply to the home inventory levels.
Growth stocks will likely be the hardest hit from higher rates. A growth stock is issued by a company that has the potential to grow at an above-average pace. Typically, they are big technology firms. They thrive when interest rates are low because they can invest in innovations at a cheaper rate. In the short term, bonds might lose money. But in the long run, they might reap higher returns.
Consumers will likely see higher interest on their bank accounts with Fed rate hikes. However, the gains won’t be immediate. It typically takes several months or years for banks to raise rates. “It’s important to do some rate shopping if you’re trying to enjoy those gains,” Baxley said.
One of the main goals of the Fed rate hike is to cool the ever-hot inflation levels. Hopefully, consumers will begin to see prices start to moderate.
High demand for workers and rising inflation have both contributed to very fast wage growth over the past few months. “I think people have gotten used to it being the first worker-friendly hiring climate in a while,” Baxley said. That dynamic may shift with higher interest rates, he said.
The good news is that the Fed generally aims to keep the benchmark rate between 2% and 5% for a healthy economy. So raising rates is a good sign that the economy will soon stabilize and moderate a bit. If you have any questions about the Fed and rate hikes, let us know. If you would like to explore your refinance options to lock in a fixed rate mortgage, check out our mortgage refinance information page.
Sources: CNBC
