How Does the Federal Reserve Interest Rate Impact Me?

If you don’t keep up with financial news, you may not pay much attention to the federal funds rate. But changes to the Federal Reserve’s interest rate can have a big impact on your daily life and budget.

But first: What is the federal interest rate?

The Federal Reserve—known as the Fed—is the central bank of the United States. The Fed is responsible for setting policies to support the U.S. economy and overseeing the country’s banks and financial institutions.

The Fed also sets the rate at which banks borrow and loan money. When this rate fluctuates, it can impact rates for consumers on all kinds of financial products, from savings accounts to stocks.

Here are some ways the latest increase in the federal funds rate might impact you.

Loan interest rates

If you finance a big-ticket purchase, the interest on your loan can add up quickly. And as the Fed has increased interest rates in 2022, mortgage lenders have followed suit: Interest rates on mortgages are steadily rising.

A few percentage points may not sound like a lot, but if you take out a mortgage at the median home price in Milwaukee (around $195,000 in August 2022), a 30-year mortgage with a 6 percent fixed rate will cost about $1,169 per month; that’s compared to $822 a month for a mortgage with an interest rate of 3 percent.

The Fed’s rate increase is also affecting other types of loans, including auto loans and private student loans, which means you may see higher interest rates on those and other loans.

Interest on personal bank accounts

Although the cost to borrow money tends to increase as the Fed raises rates, there is one silver lining: You’re likely to earn more interest on your savings.

That boost can be good news as you earn a higher interest rate on the money in your savings or checking accounts. You’re also likely to enjoy higher interest rates on high-yield savings accounts and certificates of deposit (CDs).

Credit card interest

A higher federal interest rate generally means a higher APR on your credit card, which could hurt if you aren’t paying your balance in full each month. Be sure to pay credit card bills on time to avoid racking up extra interest payments.

Related article: Best Practices When it Comes to Paying Off Credit Card Debt

Stock investments

As the Fed increases interest rates, stock prices across many sectors tend to decrease, which means your investments may take a hit. But this isn’t true across the board: Higher interest rates can sometimes boost stock values in some sectors and businesses.

The final word on the Fed’s rates

Financial institutions and markets respond in different ways to changes in the federal interest rate. If you’re unsure about your best options right now for loans, savings accounts or other financial products, work with a WaterStone Bank personal banker or a trusted financial professional. Schedule an appointment online today. We’re here just for you!