An interest rate hike means more money for savers and higher rates on debt. But the impact can differ depending on where we are within a rate-hike cycle and which sectors are affected the most.
When the Federal Reserve raises its target fed funds rate, it makes it more expensive for banks to send and receive money from one another. Eventually, those higher rates trickle down into the cost of everything we buy and sell. That’s how a series of rate-hike cycles are meant to slow an economy that’s growing too fast and curb soaring prices.
The key, however, is to do so without bringing the economy to a screeching halt. That’s why the Fed often moves slowly through a series of rate-hike cycles, gradually increasing rates a quarter point at a time.
As for how that affects you, the good news is that while rising rates will make it more expensive to finance certain things like credit card balances or adjustable-rate mortgages, it’s a great time to save. Rate hikes also mean that the APY (Annual Percentage Yield) on savings tools will increase.
Of course, as the Fed increases rates, stocks tend to move lower because investors anticipate that higher borrowing costs will dampen growth and slow consumer spending. But if you stick with your investment strategy, stay focused on your long-term goals, and continue to diversify your portfolio, you’ll be prepared for whatever the Federal Reserve decides to do next.