The Fed Increases the Fed Funds Rate: Why Does That Matter to Me?

The Federal Reserve (Fed) just increased the Federal Funds Rate .25 percent to a range of 4.50 to 4.75 percent. Why does that matter to me?

The Federal Reserve sets the Federal Funds Rate, which is the interest rate that banks use to lend money to each other overnight. When the Fed raises the Federal Funds Rate, it becomes more expensive for banks to borrow money, which can lead to an increase in interest rates for consumers. This increase can affect the average person in several ways.

Higher Interest Rates Mean Higher Borrowing Costs

First, higher interest rates can make it more expensive for consumers to borrow money. For example, if a person has a variable interest rate mortgage, their monthly mortgage payment may go up as mortgage rates increase. Similarly, the interest rates on credit card balances and personal loans may also increase, making it more expensive for consumers to repay these debts.

Second, higher interest rates can also affect the housing market. When interest rates go up, it becomes more expensive for people to take out a mortgage to buy a home. This can reduce demand for homes, causing home prices to decrease. On the other hand, if a person is considering selling their home, higher interest rates may make it a more attractive time to sell, as they may be able to sell their home for more money.

Higher CD Rates and Savings Rates

Third, higher interest rates can also affect savings and investments. When interest rates go up, depositors may receive higher interest on their savings accounts, money market accounts and certificates of deposit. The best CD rates and savings rates are around 4.25 percent and probably will go up to around 4.50 percent.

Higher interest rates are beneficial for people who have saved money and are looking to earn more interest on their savings. However, higher interest rates can also make bonds less attractive to investors, as they may not receive as much in interest payments on their bond investments.

Fourth, higher interest rates can impact the economy as a whole. When interest rates go up, it becomes more expensive for businesses to borrow money, which can reduce investment in new projects and slow economic growth. Higher interest rates can also lead to a decrease in consumer spending, as people have to pay more to borrow money.

In conclusion, a 25-basis point increase in the Federal Funds Rate can have a significant impact on the average person. While higher interest rates can lead to an increase in savings and a decrease in consumer spending, they can also make it more expensive to borrow money and have a negative impact on the housing market and the economy as a whole. The impact of higher interest rates on the average person will depend on their individual financial situation and spending habits.

 
Author: Brian McKay
February 1st, 2023