The Fed Increases Interest Rates for the First Time Since 2018…What Does That Mean for the American Consumer?

The majority of financial experts knew the event was imminent, but they weren't sure what the implications would be for everyday citizens in America.

This week, on Wednesday, the US Federal Reserve (the Fed) voted to raise interest rates by one quarter of a percent–an attempt to ward off the consequences of rising inflation across the country. The nation is experiencing the highest rate of inflation it has seen over the last 40 years. President Joe Biden is frantically trying to come up with a plan to end the rise in prices for consumer goods as well as stem the declining value of the dollar.

Cabot Phillips, a reporter from The Daily Wire, spoke on the radio show Morning Wire to provide an explanation as to why the Federal Reserve made its move and also share some thoughts on the effect it could have on the typical US household.

Phillips stated that the Federal Reserve's latest interest rate will determine a “target cost of borrowing money.” This will affect the decisions ordinary citizens make to borrow money in order to buy a house, car, or even land. The banks’ interest rates for consumer loans will be mostly determined by the rates set by the Federal Reserve.

The Federal Reserve's rate as of March of 2020 fluctuated between zero to 0.25 percent, close to nothing. The government was worried that the pandemic would cause an economic slowdown and wanted people to continue investing and borrowing money. The Fed holds meetings every six weeks to discuss issues such as the rate of interest, and during their last session, they resolved to increase the interest rate–the first time in a while.

Phillips indicated that the rates are likely to increase until they reach 2 percent at the end of 2022. He said the rate could rise to 2.75 percent by 2023's end, and this would be the highest Federal interest rate since the year 2008.

He was interviewed by Morning Wire co-host John Bickley, who asked him how this would assist in the fight against inflation.

“The general theory is that when rates rise, the average person is less likely to get loans, as the offers aren't as attractive as they have been. If that's the case, it is expected that people will stop spending and borrowing money, which means there will be less money in circulation…possibly reducing the rise in inflation,” Phillips said.

But this move will have a ripple effect on the economy, too. Phillips said that those who plan to take out bigger loans will be affected in a significant way. If there's a 2-percent increase in the rate of a mortgage on a $500,000 home, for example, it could force the buyer to spend an extra $10,000 over the course of the term.

The actions taken by the Federal Reserve will likely cause annual rates for credit cards to increase this year. The effect will be felt more severely by people with lower credit scores. Banks will make it harder for customers to open new credit lines. Mortgage rates are also expected to increase this year. People who don't have a fixed-rate mortgage are likely to face rate increases and higher monthly interest payments.

Phillips has expressed his concerns about those who declare their predictions of the economy's future. He stated that trying to predict the future will be “generally a crapshoot.” It is expected that banks will seek to convince people to keep their savings accounts, and that means CD rates are likely to rise over the coming months.

Therefore, financial advisors need to be prepared to communicate with their clients about savings and borrowing, specifically when it comes to loans with variable rates. Consumers must also be ready to tighten their belts!

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