Stock Groups

5 ways the Fed and higher interest rates may impact you


The interest rate is almost certain to rise this month. first time in three years.

To curb inflation, the Federal Reserve will likely raise its benchmark rate by 0.25 percent next week. running at a 40-year high. You can also request additional hikes likelyLater in the year

According to financial advisors, American households will be affected by the policy in many different ways.

Andy Baxley from The Planning Center, Chicago said that “The Fed raising rates affects pretty much all corners of the economy.”

1. Lending

Borrowers will pay more for financing if interest rates are higher.

This is true for student loans, mortgages, car loans, credit cards and margin loans.   

Baxley explained that the higher interest rates make it harder for borrowers to get loans.

A consumer may want to purchase a home worth $500,000 and is eligible for a mortgage of $400,000 at a fixed 30-year rate. Baxley stated that they would have to pay $80,000 more for the term of the loan and $200 per month if there was a 4% rate on their mortgage relative to 3%.

Income qualifications and down payments increase with mortgage rates — meaning new home buyers may want to speed up their search so they don’t get priced out of the market, according to Cathy CurtisCurtis Financial Planning is a California-based firm founded in Oakland by Curtis Financial Planning (CFP).

Curtis advised that customers shopping for new cars should expedite the purchase process, in order to avoid paying higher car loan rates. Investors with margin loans from their brokerage accounts may be better able to concentrate on the debt repayment, Curtis said.

Get more advice from the advisor:

Advisors advised that variable rate borrowers should think about refinancing or paying off debt sooner to get a fixed interest rate.

To be able to buy a home, potential buyers should have good finances.

According to a report, “Rushing for money to buy could lead you to financial hardship that could prove to be far more costly over the long term.” Lauryn WilliamsWorth Winning Dallas was founded by CFP Thomas, CFP.

Higher mortgage rates can cool off hot housing markets and help bring home values back to normal, she stated.

2. Investments

Financial advisors predict that higher interest rates could cause pressure on growth stocks. This stock is issued when companies have the potential of growing at a higher rate than the general market.

Baxley stated that these firms, which are the classic technology companies, thrive in low interest rates because they can make more money on innovative projects.

He stated, “It could seem like a tough road ahead growth stocks.”

Investors might be inadvertently overweight in growth stock due to high returns. They should allocate more money to value stocks — the easiest way being the purchase of a value-focused mutual fund or exchange-traded fund, Curtis said.

In the short-term, bonds will likely also lose money. This is because bond prices are not linked to interest rates.

Advisors indicated that this dynamic is greater for long-term bond funds (e.g. those with bonds maturing over 10 years, vs. one year),

According to the article, “If you must pay for college, or purchase a home in a year you should not be thinking, I can’t lose money on bonds.'” Ted JenkinChartered Financial Planner, Co-founder, oXYGen Financial Inc. in Atlanta.

Long-term, however, higher interest rates will ultimately lead to higher returns for bond investors. New bonds are issued with higher yields than the prevailing rates.

3. Save money

Nationally, the average savings account interest rate is just 0.06%. accordingBankrate’s March 2 survey.

If the Federal Reserve does not act, consumers may see higher interest rates on their bank accounts. According to experts, online banks that offer high-yield account tend to charge higher rates than traditional banks.

It doesn’t make sense to think that you can lose your money in bonds if you’re trying to purchase a house, pay for college, or even buy one.

Ted Jenkin

Co-founder of oXYGen Financial

Other savings accounts, such as certificates of deposit, would see their rates rise too.

Baxley explained that it is crucial to shop rates if one wants to make those gains.

These gains are unlikely to be instantaneous. Jenkin says that banks typically take several months or more to increase rates on savings accounts.

4. Inflation

The reason for this is higher borrowing costs. Higher borrowing costs mean that consumers and businesses will invest less, which in turn reduces the demand for goods and services and lowers prices.

5. Wages and jobs

Baxley stated that lower demand could impact certain areas of the economy’s employment and wage growth.

In recent months, record numbers of job openings have been created and wages are on the rise due to high demand and limited labor supply.

He said that people are used to the new, more worker-friendly climate. He said that higher interest rates could change this dynamic.