In the United States, the federal funds rate was raised: what does this mean for Americans

The Federal Reserve (Fed) raised its target federal funds rate by a quarter of a percentage point. Writes about it CNBC.

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The first base rate hike in three years will set the stage for six more hikes by the end of 2022.

“The war in Eastern Europe gives the Fed a reason to be more cautious, but they will still work to contain the highest inflation in 40 years,” said Greg McBride, chief financial analyst at Bankrate.com.

How the federal funds rate affects people

The federal funds rate, set by the central bank, is the interest rate at which banks borrow and lend to each other. While this is not the rate that consumers pay, the Fed's actions still affect consumer rates.

“A one-quarter-point rate hike from near zero would have minimal impact on people's finances,” McBride said. However, this is only the beginning, he added. “The cumulative effect of the rate hike is what will really have an impact on the economy and household budgets.”

Loans will become more expensive

Long-term fixed mortgage rates are already rising as they are affected by the economy and inflation.

According to LendingTree senior economic analyst Jacob Channel, the average 30-year fixed-rate mortgage is currently above 4% and is likely to continue to rise.

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A $300 fixed-rate mortgage for 000 years will cost you about $30 per month at a 1% rate. If instead you pay 432%, then the same loan will cost $4 more per month or another $4,5 per year and $131 over the life of the loan.

Many homeowners with adjustable rate mortgages or home equity lines of credit that are already pegged to the prime interest rate will be hit the hardest.

In general, ARMs are adjusted once a year, while the equity line of credit, or HELOC, is adjusted continuously.

According to Mark Scribner, managing director of Oxygen Financial in Boston, anyone with a floating-rate loan may want to refinance it to a fixed rate.

Interest rates on short-term loans, especially on credit cards, will also rise rapidly.

Because most credit cards have a variable rate, there is a direct link to the Fed's benchmark, so expect your APR to rise within one or two billing cycles.

If you owe $5000 on a 19% APR credit card and deposit $250 a month on the balance, it will take you 25 months to pay off that amount and cost you $1060 in interest. If the annual interest rate rises to 20%, you will pay an additional $73 in interest.

“A single quarter-point rate hike is unlikely to turn the financial world of cardholders on its head. However, all rate increases, even small ones, are bad news for people with credit card debt,” said Matt Schultz, chief credit analyst at LendingTree.

Schultz advised borrowers to call their card issuer and ask for a lower rate, switch to a zero-interest balance transfer credit card, or combine and pay off high-interest credit cards with a low-interest personal loan.

Even though car loans are fixed, the payments are getting bigger because the prices of all cars are going up. So if you are planning to buy a new car, then you will pay more next year.

Car buyers taking out loans for a new car borrowed an average of $2021 in 39, up $721 from a year earlier, according to Experian. As a result, monthly loan payments reached a record high of $4000.

A quarter percentage point difference on a $40 loan is about $000 per month, or another $5 over the five-year loan term.

However, the Fed's rate hike likely won't have a significant impact on how much you get, McBride said.

Federal student loan rates are also fixed, so most borrowers won't be hit immediately by rate hikes.

However, if you have a private loan, it can be fixed or variable rate, which means that as Fed rates increase, borrowers are likely to pay more interest.

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So now is a particularly good time to review outstanding loans and see if refinancing makes sense.

Investors will get more profit

While the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate. As a result, the savings account rate at some of the largest retail banks is teetering at the bottom, currently averaging just 0,06%.

Even when the Fed starts raising the base rate, deposit rates will react much more slowly.

“Many banks won't offer higher rates to savers, so where you keep your money is very important,” McBride said.

Thanks in part to lower costs, the average online savings account rate is at least three times higher than the average rate of a traditional brick-and-mortar bank.

If you have $10 in a regular savings account with a 000% interest rate, you will only receive $0,06 in interest per year. According to DepositAccounts.com, an average online savings account that pays 6% can earn you $0,46, while a five-year certificate of deposit earns nearly double that.

However, since the inflation rate is now higher than all of these indicators, any money in savings will lose purchasing power over time.

Look for other options with better rates, said Yiming Ma, an assistant professor of finance at Columbia Business School, such as money market funds, bond funds or others.

According to her, there are alternatives that will require more risk, but will bring more profit.

“Set aside enough money to cover day-to-day expenses so you are protected,” Ma said. “Invest the rest in what can bring a good long-term return.”

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