The Federal Reserve announced another rate hike in late July 2023. That marks 4 interest rate hikes in 2023. With another rate hike potentially coming up later in the year, rising rates will continue to put pressure on the economy. By extension, American households may also feel the pinch of higher rates.
Let’s explore what the impact of these rate hikes might include. Plus, how you can navigate your own financial situation during their tumultuous economic times.
Why is the Federal Reserve raising interest rates?
The Federal Reserve uses interest rates as a tool to rein in inflation. Inflation, as measured by the Consumer Price Index (CPI) hit a recent high point of 9.1% in June 2022. That’s significantly higher than the Fed’s target inflation rate of 2%.
With significant interest rate hikes, we’ve seen some progress in taming inflation. In June 2023, the CPI report indicated an annual inflation rate of 3.0%. While that’s still above the Fed’s target, it shows that the strategy of increasing interest rates seems to be working.
In the coming months, it’s difficult to predict whether or not interest rates will be raised again. The decision hinges on inflation. If inflation is back to the Fed’s target of 2%, then interest rates will likely stay where they are. But if inflation isn’t tamed, it’s likely we will see another interest rate hike later this year.
How this rate hike impacts American households
Americans with variable-rate debt and households looking to finance a major purchase will feel the pinch of higher interest rates the most.
In terms of making a major purchase, most Americans will notice the cost of higher rates.
Let’s explore an example.
As of the second quarter of 2023, purchasing a new vehicle with a 60-month loan term comes with an average 7.81% interest rate. But in the second quarter of 2022, the average rate for the same loan was 4.85%. That’s a significant jump that come with noticeable consequences for any budget.
The average cost of a new car sitting at $49,500. If we assume the buyer is financing the full $49,500 purchase price, the monthly payments are $999.19 for a buyer today. But just a year ago, the same loan amount would come with a monthly payment of $930.73.
If your household is planning a big purchase, higher rates might push you to wait. But if you already have variable-rate debt, then you might start noticing higher interest payments that could put pressure on your budget.
How to navigate higher interest rates
Higher interest rates tend to have a ripple effect across the economy. Of course, there is nothing that we can do to change the Federal Reserve’s interest rate policy. But as interest rates rise, you can take action to put your finances in a great position.
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Here are some strategies to consider:
- Make the most of your savings: Whether you have an emergency fund on hand or are building your savings, the right savings account can make all the difference. If possible, move your funds into a high-yield savings account. You can put the funds to work and enjoy the higher interest rates currently available.
- Lock in long-term CDs: If certificates of deposit (CDs) are a part of your financial strategy, consider locking in a relatively high rate. When interest rates are high, it can be a good time to make this money move.
- Focus debt repayment on variable rates: If you have debt with a variable interest rate attached, you will pay more in interest as interest rates rise. Common variable-rate debt includes credit cards and HELOCs. As you pay down your debt, consider funneling available funds into your high-interest debt payments.
The Bottom Line
As you navigate an economy with higher interest rates, carrying debt can be more expensive. But the good news is that savers can tap into higher interest rates.
If you are looking for a way to put your savings to work, explore the top high-yield savings accounts today.