Fed Interest Rates Explained

How does the Fed increasing interest rates affect you?

This year, you might have heard that the Fed hiked interest rates. We’ve gotten a lot of questions about this, what it means, and how people should respond.

Photo by Etienne Martin on Unsplash

What is the Fed rate?

The Federal Reserve, also known as the Fed, controls what is called the Federal Funds Rate. This is the interest rate that banks have to pay to borrow money from each other. This is a very simple way of explaining a robust system the Fed has to effect monetary policy.

During Covid, the Fed had dropped this rate down to about 0%, meaning that it was extremely cheap for banks to borrow money. This helped the economy stay afloat by making it cheap to spend money. However, once the economy started propping itself up, the low interest rates were one of many things contributing to inflation.

You’ve probably noticed inflation at the grocery store. Inflation is the measure of how much more expensive things get over time.

To combat inflation, the Fed has repeatedly raised interest rates this year. It’s gone from around 0% at the start of the year to around 4%.

What does it mean for you?

Here are a few immediate ways you’ll notice the increased Federal Funds Rate:

  • It’s more expensive to borrow money. If you’ve been looking for a home, you probably noticed that mortgage rates have gone up. Freddie Mac’s historical data shows that at the start of the year the typical 30-year fixed rate mortgage was at 3.22%. Now, however, the same mortgage has an interest rate of 7.08%. If you need to borrow a large sum of money for a house, car, or business, you’ll be paying more for that privilege.
  • Savings accounts have higher interest rates. The rising federal rates are translating to increased interest rates in savings accounts, especially high yield savings accounts. Some accounts are now posting interest rates of about 2.5%.
  • I Bonds rate is updated. Starting November 2022, Savings Bonds have updated their interest rates. EE Bonds now have a fixed rate of 2.1%, which is a significant increase. I Bonds, meanwhile, are composed of two rates: A fixed rate, and a variable rate that changes due to inflation. I Bonds also have a fixed rate now of .4%, which is significant because it had a 0% fixed rate for a long time.

How should you respond?

Rising interest rates pose some opportunities, just like decreasing interest rates. There might be some ways you could take advantage of them. If you’re curious how you can best take advantage of these increasing interest rates, click here to sign up for a FREE Bronze account and take our Free Financial Assessment. A licensed advisor will reach out to schedule a complimentary strategy session with you.

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