How The Fed's Rate Increase Will Affect You

The latest Federal Open Market Committee (FOMC) minutes released this week suggest the potential for seven interest rate hikes in 2022.

Wall Street and economics gurus love to make a fuss over the timing and potential implications of interest rate changes, but not every American is a bond trader, an economics professor or a monetary policy connoisseur.

Much Ado About Nothing? From a practical standpoint, a 0.25% interest rate hike means very little for the average middle-class “Main Street” American.

Related Link: Why Inflation During Times Of War Is Typical And Could Get Even Worse

Interest rates do have an impact on the average American, but it’s part of the Federal Reserve’s goal to raise rates so slowly and slightly that each individual hike doesn’t rattle the cage, so to speak. For example, the last Fed rate tightening cycle took the Fed funds rate from 0% to about 2.5% over a period of three years.

Cumulative Changes: By the end of the tightening cycle, rising interest rates will subtly impact the average American in a number of ways. Americans with debt could see a two or three percent uptick in credit card, mortgage and/or adjustable student loan interest rates.

On the flip-side, savers typically benefit from rising interest rates. But if you are hopeful that in 2022 you will be able to get a 2% interest rate on a CD or high-yield savings account, you will likely be disappointed.

Banks are under no obligation to raise interest rates along with the Fed, and they will likely drag their heels as much as they can. Rising interest rates will allow banks to inflate their margins a bit by charging higher rates on their loans while simultaneously maintaining lower rates on their deposits.

Shoppers can also benefit from rising interest rates, which are intended to help the Fed combat inflation and keep rising prices for goods and services in check.

Rising interest rates can make it more costly for companies to borrow money needed to grow their businesses, which typically hurts corporate earnings.

Interest rates that are too high can tighten the credit market and hurt the stock market. Goldman Sachs recently reported that the SPDR S&P 500 ETF Trust SPY has dropped an average of 6% during the first three months following the first interest rate hike of a new Fed tightening cycle. However, the S&P 500 has proven resilient and has historically traded higher by an average of 5% six months after that first rate hike.

Benzinga's Take: Yes, you may soon be paying a few extra bucks per month on your loans. But outside of large borrowers and savers, rising interest rates should be welcome news for the average American because they are typically a sign that the economy is healthy and strong.