11 Ways Interest Rate Hikes Will Impact Your Wallet

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With the Federal Reserve eager to tamp down inflation, the period of historically low interest rates in the United States is coming to an end.

The Fed announced an interest rate hike of 0.5% on May 4, 2022. It was the largest Federal Reserve interest rate hike since 2000 and the second increase of the year.

Inflation reached a 41-year high in April, hitting 8.5% despite the government tinkering with the formula for the Consumer Price Index. The number remained elevated at 8.3% in May.

Fed Chairman Jerome Powell said he anticipates further interest rate hikes this year. A U.S. Fed board member even said a hike of 0.75% this fall isn’t out of the question.

Powell also said the central bank will reduce its $9 trillion stockpile of Treasury bonds and mortgage-backed securities.

These extreme changes can and will create major economic impacts in the United States. But how will Fed interest rate hikes affect your wallet?

Table of Contents

What Is ‘The Fed’ and What Interest Rates Does It Control?

Central banks often change interest rates to help stabilize the economy. Typically, a central bank will lower the interest rate to stimulate the economy and raise the interest rate to slow it down.

The Federal Reserve Board (known colloquially as “the Fed”) sets the interest rate in the United States.

To be more specific, there are two separate interest rates that the Fed controls:

  • Federal funds rate: the rate that big money institutions such as banks (savings and loans) and credit unions charge each other on overnight loans.
  • Discount rate: the interest rate that the Fed charges when it makes loans to financial institutions such as banks (sometimes called “depository institutions”). Despite the name “discount” rate, this rate is typically 1% higher than the federal funds rate, as the Fed prefers that banks borrow from each other.

So when you see headlines about the Fed changing rates, they’re referring to the federal funds rate. The federal funds rate directly impacts mortgage rates, credit card APRs, personal and business loans and more.


The prime rate is the rate that banks extend to their most creditworthy customers. Historically, it’s 3% higher than the federal funds rate. Banks then add a premium on top of the prime rate based on your credit score and other factors.

The Fed’s Dual Mandate

The Fed two major goals that it’s supposed to work toward:

  1. Price stability
  2. Maximum sustainable employment

That’s a fancy way of saying the Fed is supposed to regulate inflation and protect the job market. Again, changing the federal funds interest rate is the main way that the Fed can accomplish those goals.

Economics 101: The Cause and Effect of Raising or Lowering Interest Rates

In general, when the Fed raises rates, borrowing gets more expensive. Businesses and individuals borrow less money as a result. And because money is more expensive to borrow, individuals and businesses spend less as well.

There are a host of domino effects. Corporate expansion and hiring slow down. Earnings, the number of jobs available, the perceived value of companies and the demand (and price) of goods and services may all decline.

This can help slow inflation. But raise the rates too much, and you run the risk of a recession.

When the Fed lowers rates, the opposite holds true. Borrowing gets cheaper, so businesses and individuals borrow (and spend) more money. The “velocity” of money increases, as we spend every dollar in the economy more often. Earnings increase along with company expansion (jobs, acquisitions). As a result, people tend to invest more.

This can stimulate a stagnant economy. But lower the rates too much, and you may encourage inflation.

Most of the time, a major interest rate hike or rate cut simultaneously will create a series of positive and negative consequences. The Fed is responsible for determining which set of consequences is necessary at a given time.

What Happens When Interest Rates Rise

Here are 11 of the things that can happen when interest rates rise:

  1. People have less disposable income.
  2. Inflation can slow down.
  3. Savings accounts pay higher interest rates.
  4. Borrowing money gets more expensive.
  5. The stock market may lose money.
  6. Bond prices may fall.
  7. The number of jobs in the country may stagnate or decline.
  8. Banks, brokerages, mortgage lenders and insurance companies may benefit.
  9. The national debt and the budget deficit can increase.
  10. Local products may get more attractive due to a strong dollar.
  11. People may be more inclined to pay off debt and save money.

Let’s take a closer look at how Federal Reserve interest rate hikes can impact your wallet.

1. Savings Accounts, Certificates of Deposit (CDs) and Money Market Accounts Improve … Eventually

If you’re a big saver, you may be shouting hallelujah at the notion of many more interest rate hikes.

It’s been a tough few years for the money you have stashed in a savings account. The average U.S. savings account pays a paltry 0.06% interest per year right now according to Bankrate.

With inflation above 8%, any money you have in even the best savings accounts are losing purchasing power by the day.

If you’ve carefully worked toward a six-month emergency fund, or if you’ve been setting aside a lot of cash for a down payment on a mortgage, car loan or vacation, relief is finally on the horizon.

Continually raising rates should slow inflation and improve the interest rate you earn in your savings account, CD or money market fund.

However, big banks that operate physical locations are usually hesitant to raise their interest rates.

And in many cases, rates have been so low for so long that big money institutions have had to cut down their usual profit margins. You can expect them to pocket the benefits of rising rates first before passing them along to their customers.

The outlook for liquid options on your cash should improve as long as the Fed continues to raise rates. But it will take time (and many hikes). And there’s a huge gap right now between inflation and the average savings account interest rate.

It’s tough to lock yourself into a CD right now as well, as you could get left in the dust if the Fed raises rates aggressively.


2. Expect Loans To Get Much More Expensive

When it costs banks more interest to secure money to fund your loan, it also costs you more interest to repay your loan to the banks.

Some of the interest that gets more expensive includes:

  • Credit card debt
  • New mortgages
  • New auto loans
  • Personal loans
  • Business loans

Keep in mind that all variable debt gets more expensive as interest rates increase.

It’s always a bad idea to carry credit card debt since it’s so expensive. But right now, credit card customers with balances face increasingly expensive interest rates.

In addition to supply constraints and inflation, one reason the housing market peaked earlier this year is that buyers were rushing to lock in good interest rates on their mortgages before the rate hikes started.

The average interest rate for a 30-year fixed mortgage was 3.7% on March 1, according to data from Zillow. That number jumped to 5.5% by May 8, a much bigger increase than the Fed’s combined 0.75% rate hikes.

Just a 1% interest rate hike on a 30-year fixed mortgage for a $400,000 home with 20% down can raise your monthly payment from $2,405 to $2,648.

Adjustable-rate mortgages (ARMs) doubled during a similar time period. Money expert Clark Howard discussed the downsides of ARMs on a recent podcast.

The average interest rate on a 60-month car loan jumped from 3.9% in December 2021 to 4.5% (and rising) in April.

3. The Stock Market Tends To React to Expectations in Terms of Interest Rate Hikes

Right now, it’s highly likely that the Fed will continue to raise rates. Chairman Powell has vowed to keep raising rates until he gets inflation in check.


The stock market tends to operate more on future expectations than current performance. Often what matters most is when current performance isn’t in line with expectations or when something new changes the future outlook.

If a company lost millions of dollars last quarter, for example, but the earnings report wasn’t nearly as dire as investors expected, its stock price may still go up.

I’ve explained how much higher interest rates tend to make it more expensive for companies to borrow (and therefore expand through hiring and acquisitions).

Whenever the market expects interest rates to keep going up, up and up, it tends to revise expectations of future earnings downward.

Markets often work out the price of a stock based on a multiple of future earnings. That multiple is higher for relatively new high-growth tech companies (Tesla, for example) than for boring, well-established companies (such as a company that makes toilet paper).

Growth stocks tend to suffer the most during times like we’re seeing right now. Accordingly, as of May 19, the NASDAQ was down more than 27% so far in 2022.

What Should I Do With My Stock Market Investments?

Financial stocks such as those for banks tend to perform well in reaction to interest rates rising.

Investors don’t wait for an actual rate hike to recalculate how much they’re willing to pay for a company’s stock. Accordingly, we’ve seen a massive stock market decline in the first half of this year. Of course, the market can’t see the future.

If the market consensus misjudges how many rate hikes it will take to tamp down inflation — or whether those rate hikes will send the economy into a recession — it can cause further pain, but it also could stabilize or improve prices.

The stock prices of many companies were at a historically high multiple of actual current earnings early this year. Inflation, uncertainty due to the war in Ukraine and the potential for aggressive rate hikes have all contributed to a decline.


However, most of the stock market gains are concentrated over very few days. And once the market realizes the future outlook is changing and the economy is reaching equilibrium again, we could see some rapid gains.

When that will happen is anyone’s guess. But, Clark says, you don’t want to be on the sidelines when that takes place.

4. Expect Bond Prices To Fall, At Least on the Market

Bonds are particularly sensitive to Federal Reserve interest rate hikes.

Typically, there’s an inverse relationship: Risking interest rates lead to falling bond prices, and vice versa.

Governments (as big as countries and as small as towns) and companies raise money by selling bonds. As interest rates rise, it gets more expensive to borrow money. The people buying those bonds expect a higher interest rate.

Let’s say you hold a $1,000 bond with a 3% annual interest rate. If Fed rate hikes lead to new $1,000 bonds selling at a 6% annual interest rate, and you want to sell your bond, you’re going to have to give a significant discount. Otherwise, those looking to buy bonds would just take a new 6% bond.

However, if you hold your bond to maturity, you’ll still get the 3% annual interest rate, assuming the entity that issued you the bond remains solvent.

Bonds tend to react immediately to changes in interest rates. Bonds with shorter maturities are also less affected by fluctuations in interest rates.

What Happens When Interest Rates Fall

Here are some of the things that can happen when interest rates fall:

  1. People have more disposable income.
  2. Businesses and individuals spend more.
  3. Savings accounts pay lower interest rates.
  4. Borrowing money gets cheaper.
  5. You may make money in the stock market.
  6. Bond prices may go up.
  7. The number of jobs in the country may increase.

I won’t go into extreme detail in this section. In most cases, falling interest rates cause opposite reactions to those caused by rising interest rates.


Often, if the Fed decides to dramatically slash interest rates over a period of time, it wants to stimulate the economy. If there’s a recession, which typically means falling GDP and a rise in unemployment, lowering rates can sometimes help or fix the issue.

Final Thoughts

One thing is clear at the moment: The Fed fully intends to combat inflation by continuing to raise interest rates.

In an ideal world, the central bank can get inflation under control without pushing the U.S. economy into a recession. That’s a so-called “soft landing.”

However, there are a lot of unpredictable factors that can cause inflation to linger much longer than anyone would like — or that can lead to a recession (and job loss).

It’s as important as ever to get into sound financial habits. That means things like avoiding credit card debt, building an emergency fund and investing toward your retirement consistently and over many decades.

Hopefully, you now have a better idea of some of the ways that continued interest rate hikes could affect your finances.

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