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Dashia Milden is a staff reporter for NextAdvisor based in North Carolina. She has previously written for…
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The Federal Reserve just raised the target federal funds rate range to 4.25% – 4.50%.
The 50 basis point increase pushes the rate to the highest it’s been since December 2007. It also marks the seventh consecutive rate hike for 2022.
Fortunately, this year’s rapid rate hikes are starting to show some progress in restoring price stability and bringing down inflation. The latest Consumer Price Index showed a more positive than expected year-over-year increase, moving the inflation rate down from 7.7% to 7.1%.
But what does that mean for your wallet?
Fed rate hikes impact everything from day-to-day spending to your plans to buy a home. But without knowing what’s going on and what we can control, the Fed news can be quite scary, says Kelly Luethje, CFP and founder of Willow Planning Group, a financial planning firm.
Here’s what you need to know about December’s Fed rate hike and what it means for your savings and spending:
The last several moves by the Fed have been pretty straightforward — raising interest rates has been its focus all year. But the next few months may be more difficult to predict.
“What they’ve been doing over the past eight or nine months is finally showing up in the data,” says Kevin Lao, CFP and founder of Imagine Financial Security in Jacksonville, Florida. That doesn’t mean the job is done, but it could mean a shift is coming.
In remarks following the meeting, Fed Chair Jerome Powell made it clear that there’s still “more work to do.” However, he also signaled a focus on now just how fast rates will rise but how long they’ll need to remain elevated.
“Having moved so quickly … we think the appropriate thing to do now is to move to a slower pace,” Powell said. “That will allow us to feel our way and get to that level and better balance the risks that we face.”
The question remains how high-interest rates will go, says Jose Hernandez, NextUp honoree and founder of Financial University, and author of the forthcoming book “Invest Like You Mean It”.
“It seems like they’re not really being super straightforward about what that is going to be, but we do know that they’re going to stay aggressive with the restrictive monetary policy,” he says. But he predicts that the Fed will see less aggressive interest rate increases in the new year if inflation continues to come down.
So, while rates may not rise as quickly in the new year, that doesn’t mean they’ll drop either. For borrowers and savers, banks will likely slow rapid rate increases, but savings rates aren’t going down any time soon.
As interest rates remain high, savers can benefit from boosted earnings on their balances. But the most recent Fed rate hike means that borrowers will continue to see higher interest rates too, on mortgages, credit card debt, and personal loans.
High prices combined with high-priced debts have experts and consumers alike still concerned about the future of the job market and the possibility of a recession. Fortunately, there are steps you can take to prepare your wallet for the economic uncertainty ahead:
Steeper interest rates mean you’ll pay more for new loans you take on, and any variable-rate debt you already have could get more expensive.
Before taking on a new loan or mortgage, make sure you understand exactly what you’ll owe: the payment schedule, potential fees, and interest rate. For any outstanding debt, make a debt payoff plan to knock down balances as quickly as you can.
Be sure to check whether your debt carries a fixed or variable interest rate. Many personal and mortgage loans have fixed rates, so if you borrowed recently, you may have a high-interest rate that’ll carry through the lifetime of the loan. Most credit cards, on the other hand, have variable interest — meaning the already very high APR on any balances will only grow as rates rise.
If you’re balancing saving while tackling debt, consider saving one month of expenses, then pay off your debt before circling back to building your emergency savings, Kerry O’Brien, CFP and founder of BeingFIT Financial, previously told NextAdvisor.
Savings account rates have increased by a lot this year, making it prime time to secure your emergency fund or start saving for other short-term goals.
While the Fed keeps raising rates, you can expect savings rates to go up, too. But if federal rates slow in the new year, experts predict that savings interest rates won’t increase as much, but they’ll still remain high until the Fed starts to lower rates.
If your emergency fund isn’t fully stocked (at least three to six months of expenses), start saving what you can as a financial safety net. The money can come in handy if you suffer from a job loss or unexpected costs.
Small steps can help you get started, Luethje says. “You don’t need to save $300 if you have to keep taking it out. But saving $25 per paycheck could be a good move for you.”
Start by looking at your budget to cut unnecessary spending or consider a side hustle to bring in extra income. Once you decide how much you can save, make it easy on yourself by setting up regular automatic transfers directly to your account.
Most importantly, make sure the money is in a high-yield savings account for easy access to your money in case you need it while earning a competitive interest rate — some accounts today earn over 4.00% APY.
“If you’re a saver, the rates going up can be good for you,” says Hernandez. “When interest rates go up, that effects high-yield savings accounts positively.”
For more updates on what the Fed’s latest rate hike means for you, check out NextAdvisor’s ongoing live coverage.
The Fed just increased the target federal funds rate range from 3.75%-4.00% to 4.25%-4.50%.
Another Fed rate hike means banks could respond by raising rates on savings and loan products. For savers, experts expect that more high-yield accounts will approach 3.50%-4.00% APY before the end of the year.
The experts we’ve spoken to say there’s a chance the Fed will slow, or even stop its rate hikes in the new year. That doesn’t mean rates will go down, though. Right now, it’s still unclear how long the Fed will hold rates at today’s highs.
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