The sky isn’t falling, but interest rates are on the rise.
When the Federal Reserve raises interest rates, it’s easy to wonder: What does this mean for my savings, loans, credit cards and day-to-day money?
Whether you're borrowing, saving or investing, rate changes can affect people in different ways. The good news? You don't need to make sudden financial decisions every time rates move.
At Dupaco, we're committed to helping you understand what's happening and make confident money decisions in any rate environment. So, we've rounded up answers to some common questions about rising interest rates and what they could mean for you.
The Federal Reserve, also known as the Fed, is the central bank of the United States. It sets U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.
The Federal Open Market Committee meets regularly and, among other tasks, votes on whether its current target range for the monetary policy rate is appropriate for the economic climate.
This target rate, also known as the federal funds rate, is the rate that banks and credit unions pay (or receive) to borrow (or lend) money to each other.
As a rule, the Fed raises its interest rate to slow down a strong economy or inflation. In simple terms, the Fed uses interest rates as one of its primary tools to help keep inflation under control while supporting a healthy economy. On the flip side, the Fed lowers the interest rate to help speed up a weak economy.
"While members feel the effects of higher loan rates right away, the FOMC hopes that positive outcomes come from the increase in the long run—curbing inflation and price stability," said Riley Rausch, treasury analyst at Dupaco Credit Union.
Read the Fed’s latest rate announcement >
The federal funds rate directly affects another rate—the prime rate. When the federal funds rate increases, so does the prime rate.
The prime rate is an important index used by financial institutions (like Dupaco) to set rates on many adjustable-rate loans and deposits. (Some adjustable rates can change when the prime lending rate changes.)
What does this mean?
While changes aren't always immediate, higher rates often mean borrowing becomes more expensive over time while savers may eventually see better returns on certain savings products and certificates.
These factors lead to less money circulating in the economy, which can reduce the level of inflation.
Unfortunately, there’s no way to predict how the stock market will react to rising interest rates.
The relationship between interest rates and the stock market isn't always straightforward. While rising rates can create challenges for some companies and sectors, markets can still perform well depending on broader economic conditions.
The price of bonds is inversely related to interest rates. An increase in interest rates will cause an equivalent drop in the price of bonds.
For example: Let’s say you own a five-year bond with a 2% coupon when five-year rates are at 2%. Your bond should be priced at par. But if five-year rates go up to 3%, your 2% bond now has less value.
If you own individual bonds and hold them until maturity, temporary price fluctuations might matter less because you'll generally continue receiving the bond's scheduled interest payments.
While a lot can feel out of your control with rising interest rates, there are steps you can take to protect and manage your money:
The interest rates on several kinds of debt are tied to the prime rate. And the loan rates you pay might increase as the prime rate climbs.
Hint: Dupaco uses the prime rate for Visa credit cards, home equity lines of credit, commercial loans and student loans.
While personal and auto loans aren’t directly tied to the Fed’s rate changes, these rates are also likely to increase eventually. (The U.S. Treasury and other markets influence them.)
Now is a good time to review your debt and understand which interest rates are fixed and which are variable. Depending on your situation, refinancing or consolidating debt could help simplify payments or reduce costs. You might be able to bundle high-interest debt to make your payments more manageable.
Debt consolidation might take the form of a:
A free Dupaco Money Makeover could help you look at your entire financial picture, from debt and savings to long-term goals, and create a personalized plan built around your needs.
Request a free Money Makeover >
Mortgage rates change regularly based on economic conditions. Whether rates are rising, falling or holding steady, it's smart to periodically review your mortgage and overall home financing strategy.
Depending on your goals, refinancing could still make sense, but it isn't the only option. Some homeowners may benefit from adjusting their budget, accelerating repayment or exploring home equity options that support other financial goals.
Is refinancing right for you? Contact us >
The prime rate and U.S. Treasury can influence other Dupaco products, like savings accounts. But there is no direct relationship between them.
It’s common for changes in deposit rates and loan rates at financial institutions to lag behind changes to U.S. Treasury yields.
Rising rates can create opportunities for savers. Depending on market conditions, savings accounts, money market accounts and term-share certificates may offer higher earnings than they have in the past.
If you're building an emergency fund, saving for a major purchase or setting aside money for future goals, it's worth reviewing whether your savings strategy is still working as hard as you are.
Ready to save for your goals? Let’s go! >
Alarming headlines get the most clicks. Financial markets experience periods of uncertainty, but successful financial planning is usually built around long-term goals, not short-term headlines.
Take this time to ensure your portfolio is properly balanced for the changing market conditions.
Speaking to a financial adviser will help ensure your investments are where they need to be to grow at a healthy rate.
Depending on your goals and comfort level, you might explore moving some of your money into a fixed-rate investment (like a term-share certificate).
Request a free consultation with a financial advisor >