In response to rampant inflation, which has reached its highest level in more than 40 years, the Federal Reserve is tightening its monetary policy. The central bank has adopted a series of rate hikes in an attempt to effectively increase the cost of borrowing money. Yesterday, the Fed announced another rate hike of 75 basis points, equaling June’s hike, which was the largest in nearly 30 years.
Some on Wall Street had called for an even bigger hike of 100 basis points. It looks like the Fed will continue to raise rates for the foreseeable future. The June CPI showed a 9.1% year-on-year rise in prices, more than 7% higher than what the central bank considers its inflation target.
Mind your credit
The Fed can raise, lower, or keep the target rate constant. The amount dictates the rate that banks and credit unions charge each other when lending money. As a result, people who have credit or credit card debt are the most affected.
Credit cards that have a variable rate are likely to be linked to the federal funds rate. The average annual interest rate on adjustable-rate credit cards is now 17.13%, but analysts predict it could rise to 19% by the end of the year. People financing the purchase of a car will suffer. Some predict that the Fed’s latest rate hike could push the average auto loan interest rate above 5%.
Savings and student loans
While the concept of student loan forgiveness continues to be debated in the halls of Congress and elsewhere, the Fed’s latest rate hike will undoubtedly affect a borrower’s balance sheet. Some private student loans are tied to Treasury bill rates or the federal funds rate. As the Fed hikes, borrowers pay more interest.
There is a financial upside associated with raising rates. Money deposited in savings accounts will earn more interest. However, it’s worth considering how a high interest rate benefits you. If the rate of return is 2% per year, it’s not much to write home about when prices are increasing by more than 9%. As the effective cost of borrowing changes, it’s important to consider where your money is.
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