Consumers could be affected in several ways.
- In a bold move to fight inflation, the Federal Reserve implemented its biggest rate hike in 28 years.
- As a result, consumer borrowing could soon become much more expensive.
For months, inflation has been galloping. And consumers are struggling to pay for essentials like gas, groceries and utilities. The problem has become so severe that many people are depleting their savings and racking up credit card debt just to stay afloat.
Meanwhile, the Federal Reserve just took a huge step to help fight inflation: it raised interest rates by three-quarters of a percentage point. It’s the biggest rate hike since 1994. And it means borrowing is about to get much more expensive.
Consumers need to be prepared to pay
Let’s get one thing clear – the Fed doesn’t actually set consumer interest rates. So when we talk about rate hikes, we’re referring to the federal funds rate, which is the rate that banks charge each other for short-term loans.
But when the fed funds rate rises, consumer interest rates tend to follow. And that can be both a good and a bad thing.
Consumers with money in savings accounts can benefit from higher interest rates. But those looking to borrow money could find themselves stuck paying more in the form of higher mortgage rates, personal loan rates, and more.
Higher interest rates can also cause problems for borrowers with variable interest rates on their debt. This means that consumers with credit card balances and HELOCstyle=”text-decoration: underline”> could see their interest rates increase.
Will rate hikes curb inflation?
The reason the cost of living has risen so much right now is that the supply of available property has not been sufficient to meet buyer demand. That’s because unemployment levels have been low for some time, and between stable incomes and remaining stimulus funds, consumers have had more money to spend.
If borrowing rates rise, consumers might start spending less. This could help supply catch up with demand. And once that happens, prices should start falling.
Now, if consumer spending declines to a point, it could actually trigger a recession. And that’s not ideal. As such, the Fed’s drastic interest rate hike is seen by some as too extreme. But given soaring inflation, it is also easy to argue that this is a necessary measure.
In May, the consumer price index rose 8.6% on an annual basis, according to the Labor Department. This is a level of inflation that the Fed cannot ignore. And raising interest rates is really the only weapon she has in her arsenal to help what has become a major crisis for everyday consumers.
Nevertheless, there are steps we can take to avoid being harmed by rising rates. Those with credit card balances, for example, should strive to pay them off as quickly as possible. Waiting could mean getting stuck paying more interest. Similarly, those looking to secure a fixed rate loan may want to move as soon as possible, before borrowing rates really start to skyrocket.
Mortgage borrowers with adjustable rate loans can also consider refinancing to a fixed rate loan. Granted, mortgage rates are high right now across the board, but at least that way borrowers know what rate they’re expecting.
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