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How the interest rate hike impacts your wallet

Money wallet AP
Posted at 9:09 AM, May 05, 2022
and last updated 2022-05-05 09:19:44-04

Slowing the economy enough to control inflation which is at a 40-year high but not too much to send us into a recession is the balance the Federal Reserve is trying to reach right now.

The Federal Reserve announced it will increase interest rates by .5%. That is the sharpest rate hike since 2000.

This comes after the Fed signed off on the first rate increase in more than three years back in March. We saw a quarter-percent hike then.

And there are expected to be more hikes still this year. The Fed is also expected to announce it's going to start shrinking its bond portfolio, which will further tighten credit.

"Pressing on the brakes as hard as they are on the economy will slow the economy, hopefully, will help corral inflation but, in all likelihood, it could tip the economy into a recession,” said Greg McBride with Bankrate.

The hope is the strong job market and solid consumer spending to keep that from happening and to keep the economy expanding.

McBride said you'll feel the latest expected rate hike most directly on variable rate debts. On things like credit cards and home equity lines of credit.

"Pay down debt,” he said. “Debt can really be a more significant burden as interest rates rise and, especially, so if the economy does slow substantially or end up in a recession, the less debt, you have the better you'll be able to weather the unknown from an economic perspective."

While borrowing is going to cost more, your savings will eventually pay more.