A rate hike is when the Federal Reserve increases its target interest rate, and it’s important to know how this might impact your personal finances. For those with a mortgage, student loans or credit card debt, higher rates can mean your monthly payments will go up. This is because the Federal Reserve is trying to combat soaring inflation.
However, it’s also worth noting that higher rates can be beneficial for those who are saving. This is because savings accounts and other types of savings tools usually have a corresponding interest rate, or APY (Annual Percentage Yield). When the Fed raises rates, those APYs will rise too, which can provide a nice boost to savers’ bottom lines.
The Fed has raised its target interest rate a number of times this year, and it’s expected to do so several more times next year, as well. This is in an attempt to curb soaring inflation that has been pushing the economy into overdrive.
But if the Fed raises rates too quickly, this could halt economic growth and lead to a recession. It’s a delicate balance of keeping the economy strong while slowing it down without bringing it to a screeching halt.
In addition to the domestic impact of interest rate hikes, these changes can reverberate internationally as well. For example, if the Federal Reserve doesn’t account for how its monetary policy may affect developing markets, it could limit the availability of credit to energy-intensive enterprises in the Global South, hindering the global transition away from fossil fuels.