Federal Reserve interest rate hikes make it more expensive to borrow money
PITTSBURGH (KDKA) — The Federal Reserve raised interest rates on Wednesday to fight inflation in its biggest single rate hike since 1994.
KDKA editor Jon Delano spoke to local experts about exactly what this means for us in this region.
Largely boosted by high energy and food prices, the 8.6% inflation rate is well above the Federal Reserve’s 2-3% target. The Fed hopeswill slow down everyone’s spending.
“The way you control inflation is by contracting the money supply. You have noticed that we have this trade-off here. You can live in a world with low interest rates and more inflation, or you can live in a world with less inflation and more interest rates,” says Antony Davies, professor at Duquesne University, economist.
Davies says the Fed has chosen to make it more expensive to borrow money, which will impact consumers with credit card debt and other variable rate loans.
“If you have a variable interest rate on your car loan — everyone has variable interest rates on their credit cards — those kinds of rates are going to go up. Longer-term interest rates are going to stay where they are. they are at the moment,” Davies said.
“If you have a fixed rate loan, that’s your rate for the term of your loan – every 20 years, 30 years, 15 years – whatever your term is,” notes Jim Martin, a local residential mortgage broker. and commercial.
Martin says the Fed action has no impact on homeowners who have locked in their mortgage interest rates, but he says less than 20% have variable rate mortgages locally. These interest rates will increase, along with home equity loan rates.
“Your payment does not change automatically. Most adjustable rate loans have the feature of changing on a renewal date.”
Check with your lender to find out when this happens.
Another large group affected are business enterprises that need or want to borrow money to expand their business.
“So if you’re a commercial borrower, if you’re a business looking to expand, if you’re a business looking to buy a building or something of that nature, then those rates are definitely going to be affected by at least the three-a-quarter point,” says Martin.
Bottom line: The Fed wants to make it harder for you to spend money, especially borrowed money, which it hopes will lower inflation.
But that means higher interest rates on variable-rate loans — like credit cards, auto loans, home equity loans, and most commercial business loans.
So what should you do?
“Pay off your high interest, variable interest loans. It’s basically credit cards. Get rid of that credit card debt,” Davies says.
Financial advisors agree. As interest rates rise on your credit cards and loans, making borrowing more expensive, pay off those loans faster than usual.
“You might want to prioritize this for your next dollar of savings,” says Jayme Meredith, Chartered Financial Analyst.
“Even though we say it’s really important to save, put money in your IRA and 401k, if you have really expensive debt like credit cards or maybe car loans or student loans , it may be the best home for your next dollar,” says Meredith.
With credit cards, don’t borrow more than you can repay each month, which will reduce your credit card debt to zero. And push spending back as much as possible, advisers say.
“Try to pay off that card month-to-month so you don’t incur interest charges,” says Shana Bielich, Certified Financial Planner.
“This is the time when you really need to watch your budget and watch for excess cash flow. If there is something you need, is there something you absolutely need today or is it something you can keep building that savings bucket and pay it off later?”
Another tip: Save a little on your credit card. Pay cash or use a debit card where you can only spend what you have.
It’s a delicate balance. The Federal Reserve wants to rein in borrowing-based spending without plunging the country into a recession.