The Federal Reserve was established to help stop rising inflation. announced WednesdayA benchmark rate increase of 0.25 percent was announced, marking the first rate rise since 2018. This is likely to be just the beginning of other rate increases.

With inflation up 7.9% year-over-year — well above the target rate of 2% — the central bank has raised its effective federal funds rate from 0.00–0.25% to 0.25–0.50%.

The central bank federal funds rateThis interest rate is used by U.S. banks to direct overnight lending, and it can also influence the prime interest rateLenders use this number to estimate how much you’ll be paying on mortgages, credit cards, and other loans. 

The central bank raises the interest rate on borrowing money by raising it. This discourages spending. Inflation can be reduced by this.

Greg McBride (senior vice president, chief financial analyst, Bankrate) says that consumers won’t feel any immediate effects from a 0.25% rise in the interest rate.

McBride says that a quarter-point increase in interest rates is not likely to have a significant impact on household finances. 

Loans or financing tied to the prime rate — known as a variable rate — will be impacted by the rate hike, so it’s likely that interest rates will rise slightly on mortgages, auto loans, home equity lines of credit, credit cards and private student loans.

McBride used a car-loan example as an example. He said that for $25,000 loans, a quarter-point rise in interest rates would only affect $3. According to McBride, “Nobody is going to have to downsize to an SUV or compact” because of today’s increase in interest rates.

The average interest rate on a 30-year fixed mortgage at 4.27% is as of WednesdayThe increase is more than 1% over the previous year. McBride claims that the increase in inflation and interest rates is already evident.

McBride cautions, however that Wednesday’s rate increase is not “a one-and done” and expects more rate increases over the next year. 

McBride states that it will be a while before inflation starts to show any signs of a decline.

Consumers may find the first rate hike increases to be only a small increase in their loan payments. However, subsequent rate hikes over the course of a year could increase that amount.

“The cumulative effect of all of those interest rate hikes — they can have a significant impact on household finances, as well as the job market and economy overall,” says McBride.

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