Here’s what the Fed’s highest rate hike in 28 years means for you

What the federal funds rate means to you

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and saving rates consumers see every day.

“We’re certainly going to see the cost of borrowing escalate relatively quickly,” Spatt said.

With the backdrop of rising rates and future economic uncertainty, consumers should be taking specific steps to stabilize their finances — including paying down debt, especially costly credit card and other variable rate debt, and increasing savings, said Greg McBride, chief financial analyst at

Pay down high-rate debt

However, the average interest rate for a 30-year fixed-rate mortgage is also on the rise, reaching 6.28% this week — up more than 3 full percentage points from 3.11% at the end of December.

“Given that they’ve already gone up so dramatically, it’s difficult to say just how much higher mortgage rates will go by year’s end,” said Jacob ., senior economic analyst at LendingTree.

On a $300,000 loan, a 30-year, fixed-rate mortgage would cost you about $1,283 a month at a 3.11% rate. If you paid 6.28% instead, that would cost an extra $570 a month or $6,840 more a year and another $205,319 over the lifetime of the loan, according to Grow’s mortgage calculator.

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising, so if you are planning to finance a new car, you’ll shell out more in the months ahead.

Federal student loan rates are also fixed, so most borrowers won’t be impacted immediately by a rate hike. However, if you have a private loan, those loans may be fixed or have a variable rate tied to the Libor, prime or T-bill rates — which means that as the Fed raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.

That makes this a particularly good time to identify the loans you have outstanding and see if refinancing makes sense.

Hunt for higher savings rates

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate. As a result, the savings account rates at some of the largest retail banks are barely above rock bottom, currently a mere 0.07%, on average.

“The rates paid by bigger banks are largely unchanged, so w. you have your savings is really important,” McBride said.

Thanks, in part, to lower overhead expenses, the average online savings account rate is closer to 1%, much higher than the average rate from a traditional, brick-and-mortar bank.

“If you have money sitting in a savings account earning 0.05%, moving that to a savings account paying 1% is an immediate twentyfold increase with further benefits still to come as interest rates rise,” according to McBride.

Top-yielding certificates of deposit, which pay about 1.5%, are even better than a high-yield savings account.

However, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time. 

To that end, “one main opportunity out t. is the possibility of buying some I bonds from the U.S. government,” Spatt said. 

These inflation-protected assets, backed by the federal government, are nearly risk-free and pay a 9.62% annual rate through October, the highest yield on record.

Although t. are purchase limits and you can’t tap the money for at least one year, you’ll score a much better return than a savings account or a one-year CD.

What’s coming next for interest rates

Consumers should prepare for even higher interest rates in the coming months.

Even though the Fed has already raised rates multiple times this year, more hikes are on the horizon as the central bank grapples with inflation.

While expectations for those increases had been quarter and half-point hikes at each meeting, the central bank could hand out further 50 or 75 basis point increases if inflation doesn’t start to cool down.

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