How Interest Rate Hikes Will Affect You in 2022

It may seem like we have all been inside a big protective bubble for the past few years now. One that has made interest rates we get charged almost a non-issue when it comes to many things in our lives. If you bought a home or refinanced one, or if you wanted a car loan, you’ve paid a lot less on those loans than ever in memory. That’s because the Federal Reserve (a.k.a. the Fed) had strategically lowered rates to zero at the beginning of the COVID-19 crisis in March 2020 in an attempt to soften the blow of the sharp recession that began that month as the U.S. went into lockdown.

The front of the Federal Reserve building representing how interest rate hikes will affect you

But now, the Fed has signaled plans to begin raising interest rates “soon” in a bid to tamp down inflation before it poses a serious risk to the U.S. economy. These interest rate hikes would be the first time the central bank has increased its benchmark lending rate in over three years. So by March 2022, you will be facing a new issue: Higher interest rates! How will it affect you?

The Brakes Are About to Be Applied!

Raising the costs consumers and businesses pay for loans has the effect of slowing economic activity, which in turn might curb inflation. Short-term interest rates in the U.S. are now essentially zero.

After all, higher interest rates will make you and businesses think about borrowing much more carefully. Borrowing money soon will make the payback tougher. How many times over the past few years have you been tempted by low- or no-interest ads and promotions and made transactions because of it? Too many to count I am guessing. Even during a pandemic, people have been borrowing and spending. Businesses too. Things will change with interest rate hikes.

Curbing Inflation Comes with Other Kinds of Pain

Curbing inflation raises the concern that it could put those brakes on too quickly. Financial experts and economists are talking now about how these changes will make a difference for you and me. So what does this change really mean?

Why Raise Interest Rates Now?

The Fed quickly cut rates when the pandemic began because over 40 million Americans were out of work, a truly staggering number of people. Our economy came to a halt when that happened.

Although the recession was relatively short, lasting only a few months, and the economy has been steadily recovering, the Fed has kept rates at rock bottom because many workers and businesses still need support as the pandemic continues to rage on, even right now.

However, developing over the past year and continuing on into 2022, we have another big problem. U.S. consumer prices have surged.

For ten months in a row, inflation has been above the Fed’s 2% target number and reached an annual pace of about 7% in December. This is the highest rate of inflation recorded in the U.S. since 1982. High inflation means the prices people pay for goods and services are continually going up, especially for basic items like meat and gasoline, as well as for manufactured goods like cars. You have seen it, felt it, and struggled with all of it.

The reason rates are going up now is that the Fed cannot afford to allow inflation to continue. If higher inflation becomes entrenched, it will damage our economy.

How Does the Fed Raise Rates?

The Fed sets a target range for what is called the “federal funds rate”. This rate acts like a benchmark for all interest rates in the economy. Analysts expect the first increase to come in March, probably by 0.25 percentage points. This would affect banks’ cost of borrowing, which in turn slowly filters throughout the economy as lenders charge more for loans on homes, cars, businesses, college tuition, plus credit cards and anything else you might want to buy with debt.

The only good news about this is that your bank will eventually start gradually increasing the dreadfully low interest rates they currently offer on savings and CDs. At least you can make some kind of gain here. But experts say that this rate increase might be just the first of three or four increases this year. If and when that happens, you will see a change in what you and others can and will do with their money. Hold on to it more tightly is a logical scenario!

It Affects You Straight Up

Put simply, interest rate hikes, and in turn higher interest rates, mean borrowers would need to pay more for the loans they get. If the Fed lifts interest rates this year by just 0.75 percentage points, it would translate into about $45,000 in additional interest payments on a 30-year, $300,000 mortgage. So if you want to borrow to start a business, pay for college, buy a car or do anything else, you should expect your borrowing costs to be much higher by the end of 2022.

And if you have existing credit card debt, now is the time to pay it off. Interest rates on your credit cards will be going up as well, meaning things that you already purchased will be costing you more in interest.

On the other hand, higher rates are good news for savers and investors, as their returns from activities like making deposits and buying bonds will go up. But will that be an equal offset? Probably not.

What About the Broader Economy?

Higher interest rates would likely slow down business activity. While this can help reduce inflation, it also means lower economic growth. The Fed always makes decisions based on what is happening in the economy and on how economic conditions are expected to change. And changes in the economy are often hard to predict. The biggest unknown at this point is what will happen to inflation. This is uncertain because inflation is driven by multiple factors, such as supply chain shortages and strong demand. And then there is what I call the “hidden agenda”.

That’s the thing that companies seem to be doing to recoup their losses from the past two years. They are raising their prices and shrinking package sizes just because they can. If you need proof, just look at your grocery bill and look at some of the most iconic items you currently buy. Have they gone up dramatically? Have their package sizes shrunk?

If you went to a restaurant or fast food haven you see it even more. A national chain’s burger meal with fries and drink is now at ten bucks or more, depending on where you live. It’s becoming a real battle now so get ready for even more during 2022.

But There Is More, Of Course

The labor force participation rate has still not recovered to pre-pandemic levels, and the economy is experiencing labor shortages, which could push wages and prices higher. My experience tells me that whenever wages increase (and they are up about 5% over last year right now), prices always go up.

And by the way, they never go down after inflation comes under control no matter what the Fed might do. Wages are a big controllable expense that business can pass on to the consumer.

If these COVID-19-related pressures don’t ease up soon, inflation will continue to remain high or continue to accelerate, which may force the Fed to increase interest rate hikes even faster than currently expected.

Final Thoughts

I guess this situation is why they pay the Fed Chairman the big bucks. We face a huge change in the coming months. I guess those robocalls about refinancing my mortgage are going to slow down when the rates begin to climb again to 4%, 5%, or 6%. In reality, it justifies every cost-saving measure I write about each week. Being a better shopper and using all the tools in your box isn’t something that will ever go away. It may be a changing landscape with interest rates or inflation or some other money issue, but the defense I always use is to be smarter about your personal finances and do the right things before you go down in flames. 2022 will put us all to the test.

What will interest rate hikes mean to you? Will it affect your credit card debt? Your mortgage plan? Your car loans? Are you making more money now, but seeing it all go away whenever you shop for groceries? How are your financial plans working and will higher rates throw a monkey wrench in you plan?

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