Updated: Sep 5
Original post: 7/27/22 - Updated post: 4/20/22
Why you should care when the Federal Reserve changes interest rates
The Federal Reserve has increased interest rates from nearly zero to about 5% over the past 13 months.
"The central bank's hikes are making Tesla vehicles less affordable, and thus reducing demand for them...
That's been a key driver of Tesla's recent price cuts, which ate into its profit margins last quarter." - Elon Musk
Each time the Fed raises rates, consumers can expect to spend more money to borrow.
The cost of variable-rate debts such as an adjustable rate mortgage, home equity line of credit, or some private student loan increase immediately.
Interest rates for those who carry a credit card balance from one billing cycle to the next will be higher each time the Fed raises rates. If you carry a balance on your credit card from one billing cycle to the next, consider seeking out a zero-percent balance transfer offer on another credit card.
Even future home mortgages can be influenced by the federal funds rate, which means those will likely rise as well.
This is bad news. I know. However, there is a bright side.
Keep in mind that if your debts are currently held at a fixed rate, the cost of your loan as it pertains to the increase in the federal funds rate will remain the same.
Saving rates offered by banks and credit unions are likely to rise. Savings products such as Certificates of Deposit and iBonds have high APYs when the Federal Fund rate is high.
Who is the Federal Reserve and what do they do?
The Federal Reserve System is the central bank of the United States. They set U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy. They do this by using various monetary policy tools, such as the federal funds rate. We’ll get to that in a second.
First, you can’t open an account at the Federal Reserve. Not even the President of the United States can open an account at the Fed. A matter of fact, the Federal Reserve is structured differently than all other federal institutions and banks.
The Federal Reserve system consists of member banks, Federal Reserve District Banks, a Board of Governors, the Federal Open Market Committee, and advisory committees.
Practically speaking, the Fed lends money to banks and sets the interest rate at which banks can borrow from each other. The rate they set to allow banks to borrow from one another is called the federal funds rate.
That’s why some auto loans, some home loan products, some private student loans and credit card interest rates will rise as a result of the Fed raising rates.
So in plain English, when the Federal Reserve raises interest rates, they make it more expensive for future borrowers to borrow from banks. This is because lenders will pass on their increased cost of borrowing to everyday folks.
Their role in conducting monetary policy is best explained in this Federal Reserve video.
What's next for married couples?
An important message for husbands: we encourage couples to talk about money regularly. There are a number of strategies recommended by experts.
Money dates, sometimes called household business meetings, allow couples to communicate proactively about money to tackle problems or capitalize on opportunities. Here are two resources that can help you speak with your spouse about money:
Money Dates: An overview of how to speak to your spouse about money with resources that can help.
Modern Husbands Podcast episode: Dr. Megan McCoy shares simple strategies to initially approach your spouse to talk about money.
Below are some of the financial products often impacted by changing interest rates. Feel free to use these articles as resources in your conversation.
Infographic: The Schumer Box This will help you understand how what the interest rates are or will be on credit card balances you carry over from one month to the next.
Car Dealerships – Bad Credit: What to do when a spouse with bad credit wants a car. It's can be difficult to work through the desires of wanting something with a spouse who does not fully understand the financial implications. Our article can help you explain it to your spouse, in plain English.
How to pay down debts with your spouse Interest rate hikes will be particularly painful if you or your spouse hold high interest variable rate debts. If that is the case, prioritize managing the emotions that come with it first: No Shame No Blame.
Buying a home is arguably the most important financial decision you and your spouse can make together. Do not let emotion be the primary driver in your decision.
How NOT to Use Credit Cards: Couples Edition Responsible credit card management should always be at the forefront of your daily financial decisions.
5 Tips for How to Save Money: For Couples Keep in mind that when interest rates rise, layoffs often follow. Prioritize saving for emergencies or a job loss.
Couples who learn more, save more, and spend more on what is important to them.
For engaged and recently married couples who want to manage money and the home as a team.
Self paced online courses for couples designed by national financial therapy and financial planning experts
Winning ideas from experts to manage money and the home as a team. 2023 Plutus Award Finalist: Best Couples or Family Content
A course for students ages 13-22 to learn research-backed homework hacks and independent learning strategies.
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