How to React to Rising Interest Rates
Interest Rates Are Set to Rise: What That Means for Your Money
The Fed has announced that it will raise interest rates "soon," with speculation pointing to a potential start in March at the latest. This move is in response to rising inflation, and it will be the first time in over three years that interest rates have been increased.
Raising interest rates is a logical antidote to inflation—higher borrowing costs slow down economic activity—but some fear that if the Fed acts too aggressively, it could damage the economy's recovery.
Why the Fed Is Raising Rates
The Fed lowered interest rates early in the pandemic to support struggling individuals and businesses during the economic uncertainty. However, the effects of COVID-19—such as labor shortages, supply chain issues, and market volatility—are still being felt today.
Throughout 2021, the Fed referred to inflation as "transitory." But in December, inflation reached 7%—the highest it has been in four decades. For context, the Fed's target inflation rate is just 2%.
Despite the ongoing pandemic and continued disruption from COVID variants, the Fed now acknowledges that inflation is here to stay and must be addressed.
Fed Rate Hikes: What to Expect
Raising the federal funds rate affects other interest rates across the economy. When the Fed raises its benchmark rate, banks pay more to borrow money—and they pass those costs onto consumers and businesses in the form of higher interest rates.
Markets now anticipate multiple rate hikes in 2022 to combat inflation. Here’s what that could mean for you:
Slower consumer and business spending, which can help reduce inflation.
Higher returns for savers, since interest on savings accounts and CDs may rise.
Increased costs for borrowers, including homebuyers, students, and entrepreneurs.
Challenges for those carrying credit card or auto loan balances, as variable rates go up.
What You Can Do Now
If you have financial goals that require borrowing—like buying a home, refinancing student loans, or consolidating debt—now may be a good time to act before rates increase.
Refinance your mortgage: Locking in a lower rate now can save you thousands over the life of your loan. This Money.com article provides a helpful breakdown of when refinancing makes sense.
Consolidate your debts: Consider rolling high-interest credit card balances onto a 0% or low-interest card. Just be sure to check fees and read the fine print.
Secure financing sooner rather than later: Whether you’re launching a business or buying a vehicle, acting now could help you avoid rising loan costs.
Final Thoughts
The Fed is walking a tightrope—trying to raise rates just enough to control inflation without stalling economic growth. But it’s not just about inflation or interest rates. Supply chain issues and workforce challenges add layers of complexity to the situation.
If the Fed’s moves have you rethinking your strategy, we’re here to help.
Reach out to us at info@nestfinancial.net. We work with families, individuals, and business owners in Austin and Hill Country to develop custom financial plans that are grounded in data and tailored to your goals.
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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and do not constitute financial planning or investment advice. For personalized guidance, contact us at info@nestfinancial.net.