The summer of 2022 has been the summer of I’s: in-person events, inflation, and interest rates. While in-person events and inflation have been trending up since last year, interest rates have begun to rise only in the past few months — and are expected to climb higher. Today, in fact, the Federal Reserve announced a 75 basis point increase in the federal funds rate — the fourth increase of the year. The Fed's target for the federal funds rate is now between 2.25% and 2.5%. Analysts expect further rate increases throughout 2022 as the Fed tries to tame inflation. In this rising rate environment, consumers should be aware of how the Federal Reserve's monetary policy decisions could impact personal and household finances.

Why Is the Fed Raising Interest Rates?

The Federal Reserve is raising interest rates largely because inflation is reaching levels the economy hasn’t experienced in 40 years. In June, consumer prices climbed to a 9.1% annual rate. This rate hike aims to increase the cost of credit in the economy and bring inflation under control. Essentially this means that the Fed is trying to make borrowing more expensive, which will cause businesses and consumers to cut back spending. Theoretically, with less spending in the economy, prices will start to come down and bring inflation closer to the 2% target rate. Despite the last rate increase, the federal funds rate is still near historic lows; the move alone won’t curb inflation immediately. More significantly, the move provides the financial markets a signal that the Fed is combating inflation, which could tighten lending standards preemptively. Recommended: Federal Reserve Interest Rates, Explained

How High Will Interest Rates Go?

The Federal Reserve is expected to raise rates further through the year to tamp down inflation. However, it is unclear how high the Fed is willing to push rates in this complicated economic environment. The central bankers want to rein in rising prices, but they do not want to act too aggressively and cause the economy to contract. Policymakers are also keeping an eye on the war between Russia and Ukraine while making these interest rate decisions. The economic fallout of the conflict could change the calculus for officials. That’s because there is a possibility of a weakening of the global economy, in which case the Fed will want to avoid tightening monetary policy too much.

How Will This Affect Loan and Credit Card Interest Rates?

Changes in the federal funds rate indirectly affect various financial areas throughout the economy, including loan and credit card interest rates. Another increase in the federal funds rate will likely lead to even higher interest rates on personal loans, mortgages, and credit cards. Higher interest rates mean costlier financing for borrowers. Recommended: How Do Credit Card Payments Work?

Is Now a Good Time to Refinance Existing Loans?

Since the Fed is in the process of raising interest rates, many borrowers may wonder whether now is a good time to refinance existing loans before rates go any higher. It should be noted that the federal funds rate is just a benchmark —and that other factors may be at play regarding borrowing rates. That said, whether refinancing now makes sense depends on individual financial circumstances. Borrowers with a variable interest rate loan could look to refinance to a fixed-rate loan to lock in a lower interest rate before rates climb more. Also, individuals who have high credit card debt may be wary of a future with increasing interest rates. To remedy this, a View Your Rate

What Other Impacts Will the Fed’s Rate Hike Have on My Finances?

On a more positive note, the Fed’s rate hike and the expected future increases could lead to more attractive interest rates for various types of savings accounts and certificates of deposit. The average rate paid on savings accounts is currently just 0.06%. This figure could trend higher as the Fed moves its benchmark rate. Similarly, certificates of deposit (CDs) could see an increase in rates because of the Fed’s moves. When the Fed raises rates, it leads banks to increase interest rates on savings accounts and CDs to entice depositors to put more cash into the bank. Recommended: How to Invest in CDs: A Beginner’s Guide However, changes in interest rates for savings accounts and CDs won’t be immediate; it generally takes months for banks to increase rates on these instruments. Analysts note that banks are currently flush with cash, so they may not be quick to raise interest rates on savings vehicles to attract more deposits. Nonetheless, if you have a savings account or are looking to invest in a CD, you may be able to take advantage of higher yields in the coming year.

The Takeaway

It may be daunting to hear that policymakers are raising interest rates. After all, won't that make borrowing more expensive? But rising rates may bring inflation under control, which would be a boon to consumers' wallets. A rising interest rate environment could also benefit household finances for those with cash in savings accounts as noted above. However, it will likely be a while before consumers see the benefits of rising rates on savings accounts at most banks. Fortunately, SoFi® Checking and Savings is an online bank account that offers a 3.60% APY, much higher than the current national average. You can earn this competitive interest rate, save, and spend–all in one account by signing up. And, you’ll pay zero account fees to do it. Learn more about how SoFi® Checking and Savings can help you reach your saving goals. Learn More

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If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.

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Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

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