Wealth Mgmnt

Fed Rate Increases Will Affect Your Financial Life

The Federal Reserve raised its short-term benchmark rate by a half-percentage point recently, the sharpest increase since 2000. Though widely anticipated, the move will ripple through the economy and Americans’ financial lives. The first increase in three years came in March, and in addition to the recent hike, the market has factored in a series of six additional hikes taking place through the remainder of the calendar year.

There really is no silver lining in this for consumers. Inflation is up, interests rates are rising, oil and the price of gas is staggeringly high, all culminating in a higher degree of economic pain for the average American. The following chart shows the effective Federal Funds rate through year-end, with analysts anticipating the rate to again approach 2% by year-end.

Having a modicum of understanding of how to react to rising interest rates can help protect your personal finances. There are basically four broad categories that we can analyze a little deeper regarding how to handle the Fed rate hikes. Borrowers, savers, spenders and investors. All will be affected by rising interest rates. Let’s take a look at these in more detail.


Well, if one were to go by today’s equity market reaction to the 50 basis point rate hike, you would assume that higher rates are good for the market, as the broad indexes were up some 3% today. Rates in and of themselves are somewhat ambiguous to the equity markets.

There are a myriad of factors, including psychology, that influence market behavior. However, over the longer term, data suggests that stock markets can rise in some cases during tight monetary policy.

According to Dow Jones Market Data, “Analysis showed that during the five most recent rate hike cycles, the three leading stock market indexes only declined during one rate hike cycle, in June 1999 to January 2001, during the dot-com crash.” The current rate hike cycle seems to be following the dot-com crash. Stocks have tumbled through the year, with the Dow Jones Industrial Average off nearly 9% and bond prices falling sharply as well.

The benchmark 10-year Treasury yield, which moves opposite to price, was around 3% today, a level it hasn’t seen since late 2018. Once again, investing is difficult in the best of environments, which is why it is recommended by many to not try and pick the highs and lows, but dollar cost average into the market over the long term.

Mortgage Rates

Several years ago it appeared that there was no end in sight for the top of the residential real estate market, fueled largely by low interest rates, lack of supply, and a mobile pandemic population. The benchmark for mortgage rates historically has been the 30 year U.S. Treasury bond, as that equated to the typical mortgage duration of the average borrower.

Today, however, mortgage rates are tied closer to the movements of the 10 year U.S. Treasury bond. No matter, they are both rising, albeit the front of the yield curve rising marginally more, as inversion has taken place based upon the quick rate hikes of the Federal Funds rate. Simply put, when the Fed raises rates, this pushes the yield on the Treasury note higher, which will then push mortgage rates higher.

I still scoff somewhat at those who loathe the current 5% mortgage rate environment and look to sit on the sidelines and wait rates out. My first home was purchased during the stagflation period of the late 80’s and carried a mortgage with an interest rate of 14.5%. Charlotte Geletka, managing partner of Silver Penny Financial agrees. “Anxious house hunters should look at the broader historical context. Though it might come as little consolation to buyers who have grown used to years of ultralow rates, compared with decades past, a 5% mortgage rate is still considered low.”


We’ve written before about how low savings rates have been in the U.S. in the past several years, as interest rates were low and inflation was at or below its target rate of 2%. Conventional wisdom would dictate that as interest rates rise, banks would pass on these higher rates to savers on checking and savings accounts, as well as certificates of deposits. However, banks generally tend to drag there heals and come around slowly to giving customers additional interest income.

According to Yiming Ma, assistant professor in the finance division at Columbia Business School, “Historically, banks have not been very good with transmitting these rate increases to the borrowers. They have all the incentive to not offer as much, so it’s definitely good to shop around for different types of deposits offered by different institutions.”


Just like with mortgage rates, when the Fed raises its benchmark interest rate, your credit card debt becomes more expensive. That’s because the interest rates on consumer debt like carrying a balance on a credit card tend to move in lockstep with the Fed’s rate. While the banks are reticent to pass along higher interest to consumers on savings accounts, they can’t move fast enough to pass on these higher borrowing costs to cardholders by raising the rates they charge for consumer loans.

Most credit card issuers set your APR based on the prime rate, which is the rate banks charge their least risky customers for a loan. In a rising rate environment it makes sense then to pay down consumer debt. The higher the interest rate that’s applied to your credit card balance, the more expensive it is to carry that debt. Consider paying your debt down as much as possible or take advantage of a 0% APR balance transfer card to help reduce how much extra money you’ll pay on your debt each month.

The car market is hot currently, as supply chain issues have limited the number of new cars available, which has trickled over to the used car market as well. Rates are creeping up here as well. As of the week of April 27, the average rate on a five-year new-car loan was 4.47%, according to Bankrate.com, compared with 4.12% a year ago. One would imagine with six more rate hikes this year, it’s going to be more expensive to buy and finance a car tomorrow than it is today.

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