The Federal Reserve recently raised interest rates by a quarter of a percentage point, bringing the federal funds target range to 3.75%–4.00%. The Fed made the move as inflation remains elevated and indicated through its latest projections that we could see another rate increase before the end of the year.
You may have seen the headlines and wondered: What does that actually mean for me?
Before we get into that, it helps to understand why the Federal Reserve changes interest rates in the first place.
The Fed has two primary goals: maximum employment and stable prices. When inflation is running too high, the Fed may raise interest rates to make borrowing more expensive, which can help slow spending and reduce inflationary pressure. When the economy is slowing significantly, the Fed may lower rates to make borrowing less expensive and encourage spending and investment.
Right now, inflation remains above the Fed's 2% goal, which is one reason policymakers decided to raise rates.
The federal funds rate isn't the rate you receive on your savings account or pay on your mortgage. It's a short-term interest rate that influences borrowing costs, savings rates, and financial markets throughout the economy.
So, while you won't see every interest rate change overnight, the Fed's decision can eventually affect several areas of your financial life.
Here are three places to pay attention.
If You're a Saver: Higher Rates Can Be Good News
One of the benefits of higher interest rates is the potential to earn more on your cash.
Banks and other financial institutions may increase the rates they offer on high-yield savings accounts, money market accounts, and CDs. However, not every bank will increase rates by the same amount, or at all.
That's why this is a good time to look at where your cash is sitting.
If you have a significant amount of money in a traditional savings account earning very little interest, consider whether a high-yield savings account would be a better home for money you need to keep safe and accessible.
This is especially important for your:
- Emergency fund
- Short-term savings
- Upcoming home purchase or down payment
- Money earmarked for expenses within the next year or two
You don't need to chase every small rate change. But you should make sure your cash is working for you.
And with the possibility of another rate increase before the end of the year, savers should continue to keep an eye on the rates their banks are offering. Higher Fed rates don't guarantee that your bank will automatically increase what it pays you.
If You're a Borrower: Take a Closer Look at Your Interest Rates
The other side of higher interest rates is that borrowing can become more expensive.
Rates on products tied to short-term or variable interest rates can move higher following a Fed increase.
This is a good time to review any variable-rate debt, including credit cards, home equity lines of credit, and certain private student loans or other variable-rate loans.
Pull out your most recent statements and ask yourself:
What interest rate am I currently paying?
If you're carrying credit card debt, pay particular attention to the APR. A higher rate means more of your monthly payment can go toward interest rather than reducing your balance.
And if another rate increase occurs later this year, some variable-rate borrowers could see their borrowing costs rise again.
If you're considering borrowing money soon, don't assume that the Fed raising rates by 0.25% means every loan rate will automatically increase by exactly 0.25%. Mortgage rates, for example, are influenced by several factors and don't move directly with the federal funds rate.
The key takeaway: Know what you're paying before taking on new debt.
If You're an Investor: Don't Let One Fed Decision Derail Your Plan
Interest rate changes can create movement in both the stock and bond markets.
Different parts of the market may react differently to higher rates, and there can be volatility as investors digest what the Fed's decision means for inflation, corporate earnings, economic growth, and future interest rates.
But for long-term investors, a Fed announcement generally isn't a reason to abandon your investment strategy.
If you're regularly contributing to your 401(k), 403(b), IRA, Roth IRA, or brokerage account, continue investing according to your financial plan.
Dollar-cost averaging means investing consistently over time, regardless of what the market is doing on any particular day. Sometimes you're buying when prices are higher. Other times you're buying when prices are lower.
You don't have to predict the next Fed decision or the market's reaction to be a successful long-term investor.
Consistency matters.
So, What Should You Do Now?
Whenever interest rates change, I like to bring the conversation back to the things you can actually control.
If you're saving: Check the interest rate you're earning on your cash. If you're earning next to nothing in a traditional savings account, it may be time to consider a high-yield savings account.
If you're borrowing: Review the interest rates on your credit cards and variable-rate loans. Understand how much your debt is costing you and whether higher rates affect your repayment strategy.
If you're investing: Stay focused on your long-term plan. Continue making regular contributions to your retirement and investment accounts rather than trying to time the market around Fed decisions.
A quarter-point rate increase may sound small, but changes in interest rates can create both opportunities and additional costs depending on which side of the equation you're on.
And with the possibility of another increase before year-end, now is a good time to review your savings, debt, and investments rather than waiting for the next Fed announcement.
The goal isn't to react to every headline. It's to understand how the change affects your financial plan and make adjustments where they actually make sense.
At 2nd Story Wealth Planners, we help our clients understand how changes in the economy connect to their everyday financial decisions, without allowing the headlines to drive the plan.
Because your financial plan should be built for more than one Fed meeting.