Last week, the Federal Reserve announced that it’s raising interest rates again, this time by 0.50 percent. This rise bumps the federal funds rate to a range of 4.25 to 4.5 percent. This change brings a year of aggressively raising rates to a close, all in an effort to help curb inflation. So, why is inflation a big deal?
Simply put, as inflation increases, the value of the dollar decreases. It hits our wallets by increasing the prices of goods and services (think: groceries). The Federal Reserve (Fed) is the governing body that oversees the U.S. economy through a fancy term called monetary policy. When inflation skyrockets (like it is now at a forty-year high), the Fed raises interest rates. As a result, Americans (the consumer) will slow their spending and borrowing because prices get too high. In theory, in the long run, this should help prices fall (aka decrease inflation) because consumer demand for goods and services falls.
While inflation continues to affect the U.S. economy and the Federal Reserve begins to see the effects of an economy that is reaching its limits, many are wondering just how much rates will continue to rise and how much a recession will affect them and their day-to-day lives.
So, what does this mean for you and how do these changes affect your financial playbook? In short, it means that borrowing is more expensive, BUT it also means that you may benefit from earning higher rates on your savings/investment accounts. Let’s look at which financial plays are winning and where the areas of opportunity are in light of the Federal Reserve’s latest movements.
1. Savings Accounts and CDs
Inflation is typically not seen in a positive light. However, it can have its silver-lining, especially when it comes to increased rates on your savings account. Rising rates means that financial institutions will offer rising returns on savings accounts, money market accounts, and certificates of deposit (CD). (This is the money they pay you for keeping your money in an account with them.) With CD rates rising 2.00% in the last two months and money market rates boasting higher returns during the rate hike, you may find credit unions at the forefront of the best rate offers.
If you are considering a CD, remember that you can “lock in” your rate and keep that rate through out the duration of your CD, whether that be 6 months, 12 months, 18 months, or longer. If you are considering opening a certificate, check out Spero Financial’s 12-month certificate that has a competitive rate! For details and to open an account, visit https://spero.financial/certificate/.
2. Mortgages
While the Federal Reserve doesn't set mortgage rates, changes to the federal funds rate creates a ripple affect resulting in increased mortgage rates. This year alone, mortgage rates have risen nearly 3% over what they were at this same time last year. Higher mortgage rates coupled with a rapid rise in real estate prices has created a difficult market for potential homebuyers. With more expensive housing and pricier financing, the housing market has slowed down in recent months.
3. Borrowers
Anyone looking to access new credit would benefit from rate comparison shopping since current rates are high. Whether you’re needing student loans, personal loans, auto loans, or anything else, the rates will be higher than what they were a few months ago. Aside from new borrowers, borrowers with floating-rate debt are also feeling the impact of higher rates. Those with an adjustable-rate mortgage are seeing their loan reset at higher rates which bumps up their monthly payment.
4. Credit Cards
Credit card rates also reflect the Federal Reserve’s rate hike with many credit card rates already sitting at a record high and expected to go even higher. While this isn’t a large issue if you aren’t keeping a balance on your card, it can quickly become an issue when a card has a high balance. To avoid feeling the effects of the rate hike on your credit card, make sure to pay off any balances and keep the balance paid to avoid gaining any interest on your credit purchases.
The bottom line is that inflation has caused the Federal Reserve to aggressively raise interest rates in an effort to combat inflation. This means that it is wise to carefully plan how you will utilize rates, whether that means finding the highest saving account rate or searching to find the lowest borrower’s interest rate.
While all of this can seem like financial “mumbo jumbo”, the rate hike and inflation have impacts in your financial journey along with your day-to-day life so understanding what this means is key! But this doesn’t mean you’re left high and dry in your financial journey. We are here to help you! Below are a few ways we can be a resource to you.
1. Knowledge-Filled Resources
Our website has a wealth of resources that are completely free to help you in your financial journey! From a collection of articles and blogs focused on a large range of financial topics to financial calculators to financial coaching through GreenPath, there is something helpful for anyone in any stage of life.
2. Financial Counseling
Along with a wealth of resources on our site, we also offer free financial counselling services! With Certified Credit Union Financial Counselors, we are ready to sit down with you and step into your journey in any way you need us to. Our counselors are equipped to discuss different aspects of finances, look at your personal finances, and give you education and resources to empower you in your journey!
3. A "You First" Mentality
As a credit union, we are in it for our members! We have your best interests in mind which is why we can offer competitive rates! If you are currently looking to open a certificate, get an auto loan, or purchase a home, start that conversation today with a member of Team Spero.
Always keep in mind that we are here to serve you, whether you want to open a new share account, find a great rate for your next loan, or just have a conversation about your financial journey. To contact us and for a list of all branches, visit https://spero.financial/contact/.
This material is for educational purposes only and is not intended to provide specific advice or recommendations for any individual.
