How does the rise in interest rates affect your day to day?

The Federal Reserve since March 2022 has been tightening monetary policy including successive interest rate hikes to tame rising prices. Inflation in the United States has been slowing but isn’t expected to reach the US central bank’s target of two percent until at least 2025. Experts don’t rule out more rate hikes, especially if macroeconomic data stays strong, and most don’t forecast any cuts before the end of the year.

Minutes from the March meeting of the Federal Open Market Committee (FOMC) expressed concern over inflation which is “still well above the Committee’s longer-run goal of 2 percent” and the it is “unacceptably high.” The data on price pressures in the economy “indicated slower-than-expected progress on disinflation.”

But interest rate change remains a blunt tool to tackle a nuanced economic issue and its use doesn’t come without some pain. However, “the worst pain would be if we failed to act,” according to the Fed chair. We take a look at some of the consequences of the interest rate hike and how it could affect you…

How will interest rate hike affect borrowing?

The benchmark interest rates set down by the Federal Reserve are applied to most loans in the US, meaning that the vast majority of borrowers will be affected. A higher interest rate means that you will have to pay back a larger amount when it comes to repaying the money.

People with adjustable-rate mortgages will find that their monthly payments increase. The impact on fixed-rate mortgages is less clear but the interest rate hike is likely to keep home loan rates elevated through the end of the year. The prime rate that is used along with other factors to determine credit card holders’ Annual Percentage Rate, or APR, will also be pushed up by higher Fed interest rates.

How will interest rate hike affect my savings?

If you’re hoping to put away a bit of money then now is a good time to do so because interest will accrue more quickly on any savings you have. This is precisely the point of an interest rate hike in the first place: encouraging consumers to save rather than spend, reducing the demand for products and hopefully bringing down prices.

How will interest rate hike affect the jobs market?

Despite the pain caused by high prices and high inflation, the rapid growth has been a boon for the American jobs market which has recorded huge gains under Biden’s presidency. As the US reopened post-pandemic, businesses were able to get back to normal and sought to rehire for many of the jobs lost in early 2020.

The purpose of the interest rate increases is to slow the demand for goods and services and stem the flow of money into the economy. With this in mind, companies are likely to slow the pace of hiring with fewer customers expected.

However, despite a slowdown in growth, the “very, very strong” labor market has remained extremely tight resulting in a high vacancy rate, around 1.7 jobs for every job seeker, which in turn has helped to drive up wages. Policymakers at the central bank would like to see unemployment rise to 4.6 percent from the current 3.5 percent, which the Fed chair said “many analysts believe that the natural rate of unemployment is actually elevated at this moment.”