You’ve likely heard that the Federal Reserve (Fed) raised interest rates again. This time, it was the largest rate increase since 1994.1 The 75-basis points rise will have ripple effects throughout the economy – including many you’ll feel personally. Use this guide for a better understanding of why the Fed raised interest rates, what you can expect as a result, and steps you should take to get the most out of the current situation.
The ‘why’ behind the increase
The Fed made the move to increase rates to combat inflation. The idea is for the high-rate environment to reduce consumer demand and lower the amount of money in circulation. This encourages saving and slows down the economy.
The impact on you
Inflation and the high price tags it generates stretch your dollar thinner. Despite the fact wages are increasing at rates not seen since the 80s, factoring in inflation has real wages running negative 3.5%.2 On average, consumers are currently spending $460 more every month.2 So, it makes sense the Fed would want to curb inflation and give Americans the relief they so desperately need. But some economists are concerned they raised rates too quickly and could lead the country into a recession as a result.
While cooling the economy will benefit you at the grocery store and at the pump, it may have negative consequences on the job market. An impending recession could cause companies to tighten their purse strings and pause hiring initiatives, or even downsize their workforce to cut costs.
In today’s high-rate environment you can also expect the cost of borrowing to go up. This means products like credit cards, home loans, auto loans, and more will come with higher rates – and higher monthly payments as a result. This may make buying a home less affordable for Tri-State residents, a group that’s already facing obstacles to homeownership.
Steps to take during a rising rate environment
1. Make rising rates work for you
Rising rates aren’t all doom and gloom. In fact, there are ways you can leverage them to grow your money. As rising rates make borrowing more expensive, they also increase the earning potential on deposit products. Letting your money sit in these accounts allows you to earn interest on the balance. And today’s rates are what you’ve been waiting for! Options include:
- Certificates.3 How does a guaranteed return sound? Get it by growing your money in a certificate. Open one today with a low minimum deposit of $500. Let it accrue interest until it reaches maturity, then withdraw your balance with no fees. Tip: Worried that locking in a rate will cause you to miss out on better, future rates? With a Bump Certificate,4 this worry is a thing of the past. That’s because they give you the option to “bump” your rate once a year, every year.
- Interest-earning savings accounts. An interest-earning savings account keeps your money accessible while you grow your balance risk-free. Tip: Start earning on as little as $100 when you open a Thrive Money Market5 account with General Electric Credit Union (GECU). In addition to interest earned, you’ll also enjoy no monthly maintenance fees and free access to nearly 100,000 ATMs/ITMs nationwide.6
2. Borrow wisely
As previously mentioned, rising rates will make borrowing (e.g. through loans and credit cards) more expensive. While it’s always important to pay off your credit card balance in full each period, doing so during a rising-rate environment is even more crucial. That’s because cards with a variable rate will cause you to incur high interest charges and potentially cause your debt to snowball out of control. Live within your means and only use what you can reasonably pay back on time. Doing so will help you avoid debt and protect your credit score in tandem.
You’ll also need to strategize financing for large purchases like a home or car, as economic conditions may sway you in one direction or another. For example, the demand for Adjustable-Rate Mortgages (ARMs) goes up during rising-rate environments. In fact, the demand for ARMs in April was double that of previous months.7 That’s because the interest rates offered on them are typically lower than fixed-rate mortgages. Speak with a loan officer to determine which mortgage loan option is right for you both in the short- and long-term.
3. Grow your savings
Even though a recession isn’t guaranteed, it pays to prepare for economic uncertainty with an emergency fund. Doing so ensures you have savings to dip into should you face the unexpected, like a job loss. You should save at least three months-worth of living expenses to help you and your family stay afloat. Track this goal with an app like Money Management8 so you can gauge your progress and assign a specific monthly contribution to your efforts.
GECU is here for you no matter which way the economy is swinging. As interest rates rise, we pass on the savings to you by offering can’t-miss rates on products like certificates, bump certificates, and interest-earning savings accounts. Not a Credit Union member yet? Join us today to experience the difference. You’re eligible if you live, work, worship, or attend school in select Ohio, Indiana, and Kentucky counties.