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So, you probably have heard that the US Federal Reserve Board is raising the interest rate for the first time in three years (well, unless the only news you care about these days is Kanye, Kim, and Pete).
All the financial news outlets reported the Feds raised the interest rate today by a quarter percentage point.
Policy watchers expect further rates hikes (up to 6 times) throughout the year, as the Fed governors battle to tame the runaway inflation that is hammering the country.
According to many reports, price has jumped by nearly 8% over the past year – the fastest rate of inflation since 1982 (the Federal Reserve often uses 2% as its inflation target). I’m sure you have noticed that the prices of everything have gone up – from grocery to gas to airline tickets.
And add to that is the fallout from the Russia-Ukraine war, and the economy is in for a rough ride. Of the Ukraine war, the Feds have this to say today: “The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.”
The question is what do all these mean for you, the average person who is working hard to get your financial house in order, and navigating this rapidly changing economy?
For one, a single quarter-point interest rate rise may not have any impact on your budget right now, but a persistent hike, as analysts predict will happen over the year, will become significant to your finances.
Users of credit cards, home equity lines of credit, and other variable-interest loans would see their rates climb in lockstep with the Fed move, generally within one or two billing cycles. That's because such rates are influenced by the prime rate of banks, which moves in lockstep with the Fed.
Those who do not qualify for low-interest credit cards may find themselves paying a higher interest rate on their debt. Their credit card rates would rise in lockstep with the prime rate.
If the Fed decides to raise interest rates six times or more in the next year as predicted, that will result in a significant increase in interest payments.
According to some economists, however, one possible silver lining is that raising interest rates may bring inflation under control, providing some relief to consumers.
But then, given the economic uncertainty created by the Russian invasion of Ukraine, no one really knows when this inflation will be tamed.
