How the Federal Interest Rate Changes May Impact You
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 debt consolidation loan could be used to lock in low fixed rates now and streamline the repayment process.
Additionally, borrowers with federal student loan debt who are waiting for the payment pause to end (set to happen after Aug. 31) before refinancing may not be doing themselves any favors. In exchange for not accruing interest for the remaining three months, they may be losing out on a lower interest rate that is applied for five to 20 years.
But being reluctant to give up the pause’s 0% interest rate while it lasts is understandable. To help borrowers lock in today’s rates, SoFi is offering 0% interest through Aug. 15 on federal student loan refinancing. No payments would be due before Oct. 1.
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 competitive 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.
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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
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