Credello: One Must Watch Out for These 7 Events When Interest Rates Rise

Jerome Powell, Chairman of the Federal Reserve Bank, told Americans in December that the Fed will likely raise interest rates in 2022. For consumers, now is a good time to pay off high interest debt. Your monthly payments, particularly on variable rate credit card balances, are about to go up. Here's what to expect when the rate hikes start to happen.  

1. Variable Rate Loan Payment Increases 

Fixed rate loan payments won't change, but variable interest rates are set by the prime rate, which will go up when the Federal Reserve does a rate hike. The interest rate they increase is the federal funds rate, which determines how much banks pay when they borrow. That trickles down to consumer borrowers.  

2. Bond Demand Will Go Down

Yield rates on bonds are fixed and historically low, so raising interest rates will decrease the demand for investors to buy bonds. Expect to see a decline in sales which will lower bond prices. This will cause an increase in sales for higher yield financial products.   

3. APRs on Certificates of Deposit will Rise

Investors holding long-term CDs with lower rates may want to consider getting out early and reinvesting when interest rates go up. There will likely be a penalty when you do this, but the higher return on a new CD should justify the expense.  

4. Savings Accounts will Start to Earn More

With interest rates near zero for the past two years, savings accounts have produced little to nothing in returns. That will change with the new rate hikes. The Fed predicts up to three increases of 0.25% each during 2022. That will give savings accounts a boost.  

5. Money Market Accounts Will Become More Popular

Money market accounts are like savings accounts, but with higher fixed interest rates. The effect on money market accounts will be positive when the Federal Reserve raises rates. Expect this financial vehicle to become more popular as the year goes by.  

6. Mortgage Rates will Go Up 

This is the one that will hit Americans the hardest. The home buying market has been extremely busy over the past few years. Home values have been rising and buyers have been taking advantage of low rates. Higher rates should slow that down.  

7. Credit Card Purchases will be More Expensive 

Credit card companies charge a variable rate of interest on your purchases. That rate changes when the prime rate is adjusted. Like variable rate personal loans, monthly payments on credit card debt are about to go up. Pay them off now if you're able.  

Raising Interest Rates Will Have a Widespread Effect

The point of raising interest rates, from the perspective of the Federal Reserve, is to slow down inflation. Higher rates mean better returns for savings and investments. Historically, that decreases consumer spending and slows the economy. What the Fed is doing is limiting demand by making it more expensive to borrow or purchase with credit. 

Low interest rates helped get us through the pandemic. Rate hikes are necessary to keep the recovery going without letting prices get out of hand. They are beneficial to consumers in the long run, but we'll feel the bite in multiple areas while the economy adjusts.  

Source: Credello


Categories: Personal and Family Finances

Tags: Financial Services, Interest Rates, Personal Finance

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