How the Fed's Historic Interest Rate Hike Affects Your Wallet: Credit Cards, Mortgages, Stock Portfolios And More

The Federal Reserve on Wednesday raised the federal funds rate by 25 basis points to 5.25%-5.5%, marking the highest since February 2001.

The impact the Fed's interest rate hike campaign is manifold, affecting almost every aspect of consumer and personal finance, from housing to credit cards.

Let's get into it.

Influence On Lenders’ Interest Rates: The Fed’s decision affects how banks and other lenders set their interest rates — higher rates mean increased borrowing costs for consumers, and in most cases, higher yields on cash left in banks.

The rise in interest rates also shrinks the availability of money in the financial system, further increasing the cost of borrowing.

This year, for example, interest rates on a 30-year fixed-rate mortgage ticked up to over 7% from 3.04% at the beginning of the year, a change of 3.96%, according to Bankrate. Sour news for those first-time homebuyers, or those refinancing at a higher rate.

Read Also: Federal Reserve’s No-Shock Rate Hike Draws Mixed Reactions From Economists: What The Fed’s Next Move?

Credit Approval Becomes Tougher: Higher rates don’t just mean more expensive loans — they also make it harder to get approved.

A recent New York Fed report indicated declining application rates for new credit, suggesting less interest in borrowing due to increased costs.

At the same time, rejection rates for credit applications hit a five-year high.

A Silver Lining For Savers: Despite the downside for borrowers, higher interest rates do offer some advantages, particularly for savers, as noted above.

Banks typically increase yields to attract more deposits, so while yields rarely rise as quickly or as high as the Fed’s interest rate, the average savings yield increased nearly five times in the last year.

Impacts On The Market: The Fed’s decisions also influence the stock market, impacting investors’ portfolios and retirement accounts.

Usually, cheap borrowing rates encourage risk-taking, and the prospect of higher rates can cause market volatility.

This year has been different though, evidenced by the SPDR S&P 500 ETF Trust SPY, which is up over 20% since the beginning of 2023.

Job Security And Job Market Impact: One of the most significantly impacted sectors by higher interest rates is the job market.

New opportunities created by low-interest rates are no longer viable, and expansions that seemed wise when money was cheap might be postponed, which has implications for workers who might begin to feel insecure about their positions.

Read Next: US GDP Expands At Booming 2.4% In Q2, Beating Estimates On Heels Of Latest Fed Rate Hike

Photo: Shutterstock