What happens to household finances in the event of Fed rate hikes?

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Any changes in the U.S. Federal Reserve’s interest rate can be directly felt by ordinary consumers, and its far-reaching consequences can, directly or indirectly, affect every aspect of your personal and household finances: from your student loan tab, your credit card, mortgage, your savings account, to even the prices you pay for your groceries.

Fed rate hikes can be troublesome for individual consumers, but it’s the only way for the government to counter inflation and most importantly, secure the rate to the neutral 3% or 3.5%. In this event, the value of money becomes more expensive and at the same time, scarcer.

It’s true that how Fed rate hike affects household finances is a cause of concern – even for savers with a debt burden, because of a Fed hike’s corresponding increase in the cost of debt. Credit card holders, in particular, are the most susceptible, with short-term borrowers that will carry the heavier burden of higher rates compared to their long-term counterparts. In other words, credit card holders that have fixed-rate interests won’t be immediately affected by the Fed rate increase.

Higher interest rates can also cause a corresponding yet indirect increase in adjustable-rate mortgages – even for homeowners with adjustable-rate home equity lines of credit. Existing fixed-rate mortgages, on the other hand, won’t feel the effect of fed rate hikes.

With all these concerns and real-life effects of the fed rate hikes, experts point out that if wages don’t rise as the implementation of these rate hikes mount, it’s just a matter of time until they can cause a broader economic slowdown.

Read up financial articles on LOM Financial’s official website for more information.