How This Fed Rate Hike Will Hit Your Wallet

The Federal Reserve raised its key short-term interest rate this week as U.S. economic growth remains strong and unemployment is at an 18-year low. The bottom line for borrowers is this: everything from credit cards to auto loans to mortgages is about to become more expensive because of this Fed rate hike.

On Wednesday, there was another Fed rate hike, the second of four planned this year. Find out what this means for your finances and how to cope.

The Fed’s monetary policymakers added another quarter-point to the central bank’s key interest rate, putting it at 1.75% to 2%, the highest since 2008, economists said. This is the second of a now planned four interest rate increases expected for this year. The Fed last raised its benchmark rate a quarter-point in March, moving it into the range of 1.5% to 1.75%. You’re going to feel this one right away.

If You Have Debt, You May Need Some First Aid

The most immediate effect for consumers will appear in the form of higher interest rates on credit cards, home equity lines of credit, and adjustable rate mortgages. The average credit card now charges a record-high 17%, and that will climb further, something that can be really painful. The average credit card debt is now over $6,000 per person and total credit card debt is now at an all-time record of over $1 trillion according to the Federal Reserve. This additional rise in rates will add another $1.6 billion of debt to the already record number!

Your best way to deal with high interest rates is to ask your card or loan holder for a better rate or try to seek out some other company by shopping around and looking for a better deal from someplace else. According to a recent study by CompareCards.com, only 25% of credit card holders have requested a lower APR on one of their credit cards, yet 64% of those who asked actually received a lower rate. On average, they reduced their rate by 5.5%. It never hurts to ask!

How Bad Can It Get for Borrowers?

Taking on credit card debt or taking on any “unnecessary” debt is never a good idea, especially when magnified by the interest rates on the rise. In case you need a reminder of what can and does sometimes occur, back in the early 1980’s, interest rates broke records and changed lives and not in a good way! Imagine paying over 18% interest on a 30-year fixed mortgage. It’s almost unthinkable. But that was the reality for home buyers in October 1981—a year when the average mortgage rate was almost 17%.

Unlike today, in the early 1980’s, the Federal Reserve was waging a real war with inflation. In an effort to tame double-digit inflation, the central bank drove interest rates higher and as a result, mortgage rates topped out at 18.45%!

For borrowers with adjustable-rate mortgages, the effects of the current Fed rate hike could be just as dramatic. If your variable-rate mortgage only adjusts once a year, and there are four interest rate hikes this year, borrowers should hang on to something because their monthly payment increases might deliver a knockout blow! You may be able to convert your adjustable-rate mortgage to a fixed-rate mortgage, but you’d be better be quick.

Rates on new mortgages and car loans will also be going up, resulting in higher monthly payments than before. Fixed rates have been on the rise for a while before this increase, with the benchmark 30-year mortgage rate recently hitting a seven-year high of 4.8% during the week of May 23rd before slightly retreating.

What Does It Mean for Savers?

On the other hand, rates on interest-bearing instruments like savings and checking accounts will tick up a bit and that will benefit anyone who can actually save some of their money.

But even with saving rates going up, savers can’t sit back and wait for improving returns to come rolling in to them. Savers need to aggressively pursue the banks and credit unions with the best rates and that means really paying some attention to them.

The best savings account rate is right now 2.05% and that is almost 23 times the national average of just 0.09%, according to Bankrate.com.

Why are the Fed Rates Going Up Anyway?

The Fed’s latest rate actions are a result of its dual mandate to keep inflation in check and to optimize employment. Unemployment has been steadily declining reaching 3.8% in May 2018. U.S. economic growth is expected to be in the range of a robust 4.1% to 4.5% in the second quarter, according to notes by the Federal Reserve Bank of Atlanta and the independent research firm Macroeconomic Advisers.

But, the strong economy is causing an increase in demand for resources, a moderate rise in wages and non-labor costs, and heightened inflationary fears, so the Fed raises interest rates on order to cool down the economy and keep prices in check. Right now, the inflation rate is above the 2.0% that the Fed had projected the annual 2018 rate would run. And that has them worried.

The current inflation rate is 2.5% for the 12 months ended April 2018, according to the U.S. Labor Department. The Fed inflation target of 2.0% is anticipated to be over that for a period of time, perhaps into next year.

What Will Be the Market’s Reaction?

The stock market already factored in the rate increase and shouldn’t have a strong reaction from the Fed’s decision this week. The market expected the June rate hike and is expecting more rate increases this year.

The price of money is rising, and as it continues to rise it will buffet financial markets according to most leading economists. Their advice is that investors should stick with their current investment strategy.

Cutting Expenses and Increasing Income

Unless you’re part of the “one percent”, you can’t sit around and just hope that things will improve. I am always in favor of being more frugal or at least not wasting my money and being totally aware of what I have and where it’s going. You need to be too. Does the phrase “affordable budget” ring any bells? But when inflation is up and you have big debt, it becomes like oxygen to your body to insure you financially survive.

If you don’t know what you have coming in each month, find out. If you don’t track your expenses and budget accordingly, start doing it right away. If you are slipping further and further into debt, consider all of your alternatives from cutting out unnecessary expenses to taking on a side hustle or part-time second job. Whatever it takes to weather the storm is what you need to do right now, before that knockout punch comes.

Final Thoughts

The economic cycles always fluctuate and go around in circles. What happened in 1981, can and will happen someday again. The prosperity of the 1990’s will also come around too; it’s just that we never really know when and why. If we did know all of the reasons and ways to keep the “financial seas” calm, don’t you think it always would be that way?

What are your concerns about inflation and interest rates? Are you in debt and will you be able to weather any financial storm ahead? Are you frugal and know where your money is and where you’re heading or is it time to wake up and do something right now to prevent a knockout punch for you and yours? Are you prepared for more Fed rate hikes in the future?

Financially Savvy Saturdays

About Gary Weiner @ Super Saving Tips

Over the last 45 years I've worked in retail (department stores and supermarkets) and financial planning. In addition, I am a shopper, born and bred, who enjoys the challenges of finding the best items for the best prices. When I'm not busy saving money or writing here at Super Saving Tips, I enjoy baseball, music, and classic movies. I am retired and live in New Jersey with my wife.
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10 Comments

  1. I need to get hunting for some high-interest cds. We are getting closer to retirment and its time to increase our cash stash but I hate to get “nothing” for it. 2% is a whole lot better thann .02

  2. Hey, Gary. I remember the early 80s well. I was going to college at the time and wasn’t searching for a home. But I distinctly remembering my parents and older relatives wondering if my generation would ever be able to own a home. Interest rates like you said were in the 17-18% range and homes on Long Island were going for $80K. Yikes! I don’t fear interest rates as much as I fear inflation. I’m not borrowing anytime soon, but I will be buying stuff over the next 30 or 40 years. Very sobering post, my friend. And very sound advice. Cheers.

    • It’s good to be able to advise younger people of what has happened in the past so that they have an idea of how bad things could really get. It’s just more of a reason to take the necessary steps to protect your financial health and prepare for the long haul. Even in the middle-aged years, that long haul can wind up being 30-40 years easily, like you said. Thanks for your feedback, Mr. Groovy.

  3. “The best savings account rate is right now 2.05% and that is almost 23 times the national average of just 0.09%, according to Bankrate.com.” THIS! Actually, I enjoyed all of this post but that stood out to me in particular. I was pretty pleased with my Discover account, but I think it’s stalled out at 1.6 or 1.7. Might be time to go hunting soon!

    • Always a good plan to review your interest rate income because rates seem to change frequently. When there is no penalty involved to move your money around, I say go for it! Every dollar is important these days. Thanks for your comments, Penny.

  4. Thanks for the link to the budgeting article. I am just starting to look at budgeting software. Does quicken work if you do not link your accounts to it and enter the transactions manually?

  5. “According to a recent study by CompareCards.com, only 25% of credit card holders have requested a lower APR on one of their credit cards, yet 64% of those who asked actually received a lower rate. On average, they reduced their rate by 5.5%.”

    The number of those who received a lower rate and the amount of the reduction caught me by surprise. Nice find!

    As a saver, the current protracted low interest rate environment (the longest in history!) has been hard to stomach. I’m eagerly looking forward to rates going back up, as they will not only result in a better return on safe investments, but will also help temper cost increases due to inflation.

    There’s the added benefit of moving further away from 0%, so should another recession hit the Fed will have more ammo to try to combat the downturn with. With rates so close to zero for years, if another recession did strike we’d almost certainly be looking at negative interest rates, something I hope we never see happen here state-side.

    A well-rounded article, Gary! Thanks for the read.

    • I appreciate that, Mr. FFP. I would agree with your assessment about the longevity of the 0% interest impact and its potential effect on any kind of inflationary increase. Let’s pull for the fact that the government’s 2% inflation target will be met and that interest rates will help give us a good return on safe investments.

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