The Fed Raised Interest Rates Again. Here’s What It Means for Your Finances

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The latest rate hike has the potential to hurt consumers who are looking to borrow or who owe money on credit cards and HELOCs. Read on to learn more. 

Inflation has been a persistent problem since 2021, and the Federal Reserve has been committed to bringing inflation levels down. Beginning in early 2022, it began raising its benchmark interest rate in an attempt to cool inflation. It then continued to raise interest rates in the course of its next 10 consecutive meetings before taking a break from rate hikes in June in response to cooling inflation.

But on July 26, the Fed announced it would be raising interest rates once again, this time by a quarter of a point. And while that’s not a particularly drastic rate hike on its own, it could be enough to wreak havoc on consumers.

Why is the Fed continuing to raise interest rates?

The Federal Reserve feels strongly that 2% inflation is an ideal level to target, since it lends most naturally to long-term economic stability. In June, annual inflation was measured at 3%, per that month’s Consumer Price Index (CPI). So clearly, we’re headed in the right direction. But the Fed isn’t satisfied with 3% inflation, which explains why its rate hike pause was just a temporary one.

How will the latest rate hike impact consumers?

When we talk about the Fed raising interest rates, we’re referring to the federal funds rate, which is what banks charge each other for short-term borrowing purposes. However, when the cost of borrowing rises among banks, it tends to trickle down to consumer products, like auto and personal loans. So those looking to borrow in the near term could see higher interest rates attached to their loans as a result of the Fed’s latest move.

Meanwhile, credit card and HELOC borrowers could see the interest rate on their debt rise in the near term, since these products commonly come with variable interest that changes with market conditions. That could cause already struggling borrowers to fall behind on their payments.

That said, the Fed’s latest rate hike isn’t all doom and gloom for consumers. The one silver lining is that rate hikes on the part of the Fed tend to lead to higher savings account and CD rates. So consumers with money in the bank are in a good position to capitalize on higher interest rates.

Will the Fed continue to raise interest rates beyond this point?

It’s likely that we’re in for at least one more interest rate hike before 2023 comes to a close. That said, we may get a pleasant surprise out of July’s CPI, which is scheduled to be released in August. If that report shows a further cooling of inflation, then the Fed may decide to let things be and not raise rates again.

All told, the latest interest rate hike could make borrowing more expensive, so if you’re able to hold off on signing a loan for now, that might work in your favor. And if you’re carrying a credit card or HELOC balance that’s becoming more and more unmanageable by the week, you may want to look at consolidating that debt via a personal loan with a fixed interest rate so you can at least benefit from predictable monthly payments.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.

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