Advantages, disadvantages and how to benefit from them

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The Federal Reserve on Wednesday raised its benchmark interest rate by 0.75 percentage points – the biggest increase since 1994 – in an attempt to reduce today’s record inflation.

While the Fed is expected to keep raising rates for the rest of 2022, the bigger conundrum remains: keep raising rates, which could cause an economic slowdown and recession, or not raise rates and therefore not prevent to control runaway inflation.

Interest rates affect our overall macroeconomic picture, but they also have a tangible effect on our personal finances, including student loans, car loans, mortgages, savings accounts and more.

Below, Select explains in more detail the pros and cons of the Fed’s interest rate hike, and how everyday consumers can take advantage of it.

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Benefits of Fed Rate Hikes

The broader goal of the Fed’s interest rate hike is to slow economic activity, but not too much. When rates rise, which means it becomes more expensive to borrow money, consumers respond by refraining from major purchases and reducing their spending. The idea is that, in the current environment of high inflation, this drop in consumer demand can contribute to bring prices back to “normal”.

We’ve seen this scenario play out a bit in the housing market before. Over the past six months, average 30-year fixed mortgage rates have gone from 3.22% on January 6 up to 6.28% on June 14. That rate hike caused a noticeable slowdown in mortgage demand, hitting a 22-year low in mortgage applications last week. And with consumers facing higher mortgage rates to pay for a home, home prices are starting to come down. Nearly one in five sellers lowered the price of their home in the four weeks to May 22. according to Redfin.

How can you benefit

For everyday consumers, this housing market could offer good news. Laurence Kotlikoff, an economics professor at Boston University, told Select that mortgage rates are still at historic lows (for now). In fact, a low fixed rate mortgage can be a good hedge against inflation.

Not looking to buy a house? Consumers can still take advantage of the expectation of further rate hikes in the coming months by refinancing any high floating rate debt that may become even more expensive. Although the Fed recently announced a rate hike, it takes a while to “bake” in the market, so you should refinance any high-interest debt now before rates rise even higher. For example, private student borrowers who pay a high variable interest rate may want to refinance to a fixed rate to lock in what will ideally be a lower rate today than in the future. SoFi offers fixed rate loans with loan terms of five, seven, 10, 15 and 20 years, plus no origination fees for refinancing.

SoFi Student Loan Refinance

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, private, graduate and undergraduate loans, Parent PLUS loans, medical and dental residency loans

  • Types of loan

  • Variable rates (APR)

    From 2.24%; from 2.37% for resident doctors/dentists (rates include automatic payment reduction of 0.25%)

  • Fixed rates (APR)

    From 2.99%; from 3.12% for resident doctors/dentists (rates include automatic payment reduction of 0.25%)

  • Loan conditions

  • Loan amounts

    From $5,000; more than $10,000 for residential medical/dental loans

  • Minimum credit score

  • Minimum income

  • Authorize a co-signer

Disadvantages of the Fed rate hike

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a member of the FDIC.

  • Annual Percentage Yield (APY)

  • The minimum balance

    None to open; $1 to earn interest

  • Monthly fee

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *Cycle withdrawal limit of 6/instructions is waived during the Coronavirus outbreak under Regulation D

  • Excessive transaction fees

  • Overdraft fees

  • Offer a current account?

  • Offer an ATM card?

At the end of the line

There is no doubt that the Fed has a difficult decision to make when raising interest rates to combat high inflation, as there are both pros and cons to doing so. However, everyday consumers like you and I can benefit from knowing these benefits and risks and modifying our personal finances to make the most of them.

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Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

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