The Federal Reserve plays a critical role in the U.S. economy by controlling the country’s monetary policy through the adjustment of the federal funds rate among other tools it employs. When the Fed decides to raise interest rates, as it has eleven times since March of 2022, it sets off a series of consequences that impact the economy. One of the most significant impacts is felt by individual and business customers. Below we explore how Federal Reserve rate policy affects consumers who rely on banks and credit unions for financial needs.
Changes In Loan Interest Rates:
As the federal funds rate increases, bank and credit union borrowing costs rise, prompting them to raise interest rates on loans including Mortgages, auto loans, personal and business loans. Consequently, borrowers will face higher monthly payments, making borrowing more expensive and potentially reducing overall demand for loans.
Changes on Savings and Deposit Rates:
While an increase in rates poses a potential challenge for borrowers, it can prove advantageous for savers. Banks and Credit Unions will offer higher interest rates on savings accounts, certificates of deposits (CDs), and other deposit products. This may benefit individuals who rely on interest income from their savings, encouraging them to save more and earn a better rate of return.
Impact on Homebuyers and Real Estate Market:
For potential homebuyers, a series of Fed rate hikes may have significant implications. As mortgage interest rates increase, the cost of financing a home purchase increases. This may lead to a slowdown in the real estate market as fewer buyers can afford to purchase a home at higher rates. Homeowners with adjustable-rate mortgages (ARMs) may face higher monthly payments as rates reset as prescribed in the loan note. This may create additional financial strain for households.
Impact on Personal Finances:
In a rising rate environment, individuals must be mindful of their personal finances. Best practices include reviewing household budgets, prioritizing debt repayment, and exploring options to potentially refinance debt. Those with variable-rate loans should anticipate higher interest costs and prepare accordingly.
As discussed above, Federal Reserve policy has a far reaching impact on economies, consumers, and businesses. Changes in lending and deposit rates create both challenges and opportunities for bank and credit union customers. As the Fed’s decisions continue to shape the economic landscape, being informed and proactive in managing personal finances becomes critical for customers to navigate potentially challenging times.
Liberty Bay Credit Union stands by its members and is always available to assist with questions or concerns. Please do not hesitate to Contact Us. We also offer educational content spanning multiple financial topics here.