The Fed Is Continuing To Raise Interest Rates. What Does This Mean for Your Loans and Debts?

By: David Halverson September 26, 2022

With news that the Federal Reserve raised the federal funds interest rate to a range of 3% to 3.25% on Sept. 21, 2022, consumers are faced with a mixed bag of pros and cons. On the plus side, this means that the interest rate on savings accounts is the highest it has been in years, giving savers a welcome reprieve from the near-zero interest rates they have faced recently. But on the downside, it means that credit products, from auto loans to home mortgages and everything in between, are getting ever-more expensive. As with any financial situation, however, the answer is not to bury your head in the sand and wait for things to get better. The best approach is to arm yourself with as much information as possible and take action where necessary to improve your financial position. Here are the things you should know about how the Fed’s campaign to stamp out inflation is affecting your loans and debts and what you can do to help mitigate any damage.

Credit Card Rates Will Continue To Trend Higher

Credit card rates are among the first to jump higher in response to rate increases by the Fed. This is because banks are quick to charge more money to customers, but slower to raise the savings rates they pay out. Although the correlation between Fed rate increases and credit card rates is not 1:1, you can expect that credit card issuers will boost rates by close to 0.75% relatively quickly thanks to the Fed’s three-quarter-point raise on Sept. 21.

Promotional Rates Will Be Fewer and Farther Between

During booming economic times, credit card issuers become fast and loose with promotional credit card offers, particularly 0% balance transfer offers. But with rising inflation and the Fed raising rates to choke economic growth, many economists are calling for a recession in 2022 and/or 2023. In this type of environment, promotional rates will likely be harder to find. If you’re in need of one, it might be a good idea to snag one while you still can.

Your Fixed-Rate Loans Will Remain Static

One of the benefits of a fixed-rate loan is that even when interest rates rise, your loan will stay the same. In a rising-rate environment – which appears to be the case until at least sometime in 2023 – grabbing fixed-rate loans can pay off. Although a rate of 8% or 9% on a personal loan may seem high now, for example, those rates might hit 11% or even higher just a few months down the road. Although predicting interest rates is a bit of a gamble, as the Fed has clearly stated it will continue to raise rates until inflation is tamed, it’s a good bet that they will continue higher throughout 2022.

Your Adjustable-Rate Loans Face Potentially Dramatic Increases

If your loan has an adjustable interest rate rather than a fixed one, you could be in for a rough patch over the coming months. As the name suggests, adjustable-rate loans adapt to the current interest rate environment, which is rising. While you may have gotten a lower rate when you took out the loan vs. a fixed rate, your rate is likely headed higher, and potentially much higher. This might be a good time to sit with a financial advisor or loan specialist and determine if you should try to swap into a fixed-rate loan before your rates adjust too high.

When Are the Remaining Fed Meetings in 2022?

The Fed has two remaining meetings in 2022. They’re scheduled to be held Nov. 1-2 and Dec. 13-14. [30] Estimates for how much rates will rise at these meetings vary considerably, but few expect anything but significant raises at each of these meetings. The Federal Reserve itself announced at its Sept. 2022 meeting that it estimates the fed funds rate will hit 4.4% by the end of 2022 and 4.6% in 2023, [31] up from the current level of 3% – 3.25%. In other words, by 2023, the already high rates seen as of Sept. 21, 2022 are expected to jump an additional 1.35% to 1.60%, or perhaps even more.

What Should You Do Now?

With inflation remaining elevated, even the Fed itself sees rates jumping significantly over the next year-plus. Even if the Fed ends up raising rates less than it anticipates, it seems almost a certainty that rates will be higher by the end of 2022, and again by the end of 2023. Knowing this trend in advance can help you plan out the best way to manage your debt portfolio. Consulting with a loan expert can be a good way to ensure that you’re keeping all your financing options open and availing of the lowest interest rates that you can possibly get. This is particularly true if you have any adjustable-rate loans, as you might want to look at your options before your costs start escalating more than they already have.

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