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What the Recent Federal Reserve Rate Hike Means for the Average Citizen

In line with what economic soothsayers had predicted, the Federal Reserve recently hiked the federal funds rate after a 2 day discussion over the issue. The rates have been hiked to somewhere between 0.5% and 0.75%, which indicates a quarter percentage raise.

The last time the Federal Reserve did this, it was December 2015. It is also only the second time the Federal Reserve has made the decision to hike interest rates in a decade. In fact, we can expect more of this in the coming year too.

The federal funds rate serves as a benchmark as far as interest rates go. The cost of lending is determined by this benchmark. When the rates go up, the cost of borrowing for financial institutions also goes up. What normally happens as a result is that the increased costs are passed onto customers as higher interest rates.

To put it simply, it’s going to get a little more expensive to pay back mortgages, car loans, or any other loan for that matter.

But, how bad is it going to be? Well, let’s take a look.

Interest Rates Aren’t That High

One thing we need to realize is that, even with the hike, the interest rates are still very low. Things have been far worse in the past. For example, just two years prior to the peak of the recession in 2008, the federal funds rate was over 5%.

Rewind even further and we’re looking at rates of almost 10% in the late 80s. In the early 80s, rates were well over 10%.

Compared to that, things are relatively far better now.

Good for Saving

If you’re someone who saves, you’re likely to benefit due to the rate hike. When interest rates go up, banks will have to pay more interest on applicable accounts such as a savings account. So, make the most of it and start saving.

This also means that retirees can expect to enjoy higher returns if their income comes from fixed annuities. Fixed annuities may start to enjoy a higher fixed rate, which translates to a flat rate for a particular time period.

Borrowing

There is bound to be an increase in interest rates on credit cards and loans, especially in the case of variable interest rates. However, according to financial experts, this shouldn’t be a problem for those with good credit scores.

Credit scores will still play a key role in determining interest rates, so, it would be wise to keep things in the acceptable range.