- [Narrator] The Federal Reserve has signaled
that it would begin steadily raising
interest rates in mid-March.
- Against a backdrop of elevated inflation
and a strong labor market,
our policy has been adapting
to the evolving economic environment.
- [Narrator] It's the latest step the Fed is taking
toward removing stimulus to bring down inflation
and marks the first time it has raised borrowing costs
since December of 2018.
Expectations of a faster pace
of rate rises prompted investors
to change strategies they had used for nearly two years,
leading to the worst stock market selloff
since the early days of the pandemic.
WSJ personal finance reporter J.J. McCorvey
breaks down how the rate hike could affect mortgages,
loans, credit cards and your retirement planning.
(pensive music)
- The market's rates have already been increasing
in anticipation of the Fed rate hikes
but now they're expected to go up even more through 2022.
However, if you have a 30-year fixed rate mortgage,
you have less reason to worry
because your rate is locked
and you likely won't be affected.
- [Narrator] While fixed rate mortgages
have a set interest rate for the life of the loan,
repayments on adjustable-rate mortgages
become more expensive when interest rates go up.
The rate increase could also pose challenges
for those shopping for a home.
- For people who are new home buyers,
the higher rates could make it harder
to qualify for a mortgage.
- [Narrator] Even small rate increases can be costly
if applied to big purchases
when stretched over the life of a multi-year loan.
(dramatic music)
- Rising rates will impact both private
and federal student loans.
New interest rates apply to only new loans
but people who have existing private loans
might have the option to refinance.
Refinancing student loans
could be a good option for those
who qualify for a better rate
based on changes in credit or income.
When it comes to auto loans,
similar to fixed rate mortgages,
most won't be affected if you already have one
because they usually come with a fixed interest rate.
- But if you're shopping for a car,
a new loan with higher interest
means you'll be paying a little more money.
(dramatic music)
Interest rates on credit cards
are typically not fixed.
In fact, credit card interest rates
change almost immediately after a Fed rate increase.
If your interest rate rises,
so could your minimum payment
and that could make it harder to pay off debt.
- While higher interest rates means more money
can be earned from savings,
if you carry a credit card balance month to month,
a higher interest charge could be applied
to those balances.
Paying balances in full
will help avoid additional costs.
(dramatic music)
- If you have an interest bearing savings account,
that could mean a little more money for you
but how much that changes depends on your bank.
- [Narrator] The national average interest rate
for savings accounts is .06%
but some banks have savings rates higher
than the national average,
which will earn savers more money.
- Experts say fixed rate savings,
such as annuities and short-term bond yields will also rise.
This could benefit folks
who live off interest.
Markets have already experienced some volatility due
to the expected rate hike,
which has pushed some investors towards safer bets.
- [Narrator] Those safer bets could include dividend stocks
and gold exchange traded funds,
some of which have outperformed this year.
(pensive music)
Federal Reserve Chairman Jerome Powell
has left the door open to raising rates
at consecutive policy meetings,
which are held about every six weeks.
The Fed hasn't raised rates at that frequency since 2006.
While Powell says he expects inflation rates
to decline through the course of the year,
he admits the economic outlook remains highly uncertain.
- With this in mind,
we will remain attentive to risks,
including the risk that high inflation
is more persistent than expected
and are prepared to respond as appropriate
to achieve our goals.
(pensive music)