As 2022 progresses, you may notice the interest you earn in a savings account ticking higher, or you may see a larger interest charge on a credit card bill. That’s because the Federal Reserve is recalibrating monetary policy in 2022, and those changes will trickle through the entire financial system.
Here’s more on why interest rates are rising in 2022 and what it means for you.
Why interest rates are rising
The Fed is a massive bank that controls the amount of money available in the U.S. economy — it shapes monetary policy. To stimulate the economy in a crisis and spur employment, the Fed increases the amount of money in circulation by purchasing bonds or lowering interest rates to make debt more appealing. The Fed did this in a big way to counteract the economic fallout from the pandemic in March 2020 (it lowered interest rates to 0 and purchased billions of dollars-worth of bonds every month).
But when the Fed wants to “slow” the economy to, for example, fight elevated inflation, it aims to reduce the amount of money in circulation by halting its bond purchases and raising interest rates to make debt a little less appealing. This is the direction the Fed is heading in 2022 for several reasons: inflation is at multi-decade highs, the labor market is strong, and the economy is no longer in a crisis as it was in March 2020.
Looking ahead in 2022, the Fed intends to raise rates and could do so at several policy meetings through the year. Rate hikes from the Fed garner a good deal of press in media because the so-called Federal funds rate effects just about everything else in the U.S. financial system.
How Interest rates impact your finances
When the Fed raises rates, it first sends ripples through stock valuations and bond markets, which can trigger some volatility in investment portfolios. In turn, adjustable-rate mortgages, credit card debt, savings accounts, student loan debt, bank deposits (basically any financial instrument that carries a variable interest rate) tend to adjust proportionally. In basic terms, when interest rates rise borrowing money is more expensive, but you’ll earn a little more on your savings.
Personal finance considerations when rates rise
When interest rates are rising, there are a few things worth considering as you think about your budget or broader financial goals.
- If you’re in the market for a home, there are ways to lower your mortgage rate if you’re aiming to hit certain monthly payment number. While it all depends on the rate and type of mortgage, a 1 percent increase in the rate may amount to a few hundred dollars on each monthly payment.
- Review your variable rate debt and payments, particularly high interest rate debt, as your interest charges will also change as rates rise. Fixed-rate debts will not change.
- The interest earned in your savings account or on bank deposits will typically rise along with the Fed rate, adding a bit more each month to your interest-earning savings.
- Lastly, if you’re planning to take out a loan soon, know that the interest you’ll be charged today may be a few percentage points higher 12 months from now.
Don’t sweat interest rates too much
Although interest rates are due to rise in 2022, you probably don’t need to drastically alter important financial decisions as a result, but there are little tweaks worth considering. However, you shouldn’t feel pressure to rush a home purchase or settle on a home to “lock in” a low rate as there are ways to defuse the impact in a mortgage. And even if you do have to settle for a slightly higher payment in the future, budget may not be the only consideration when it comes to big financial decisions.
In general, the budgetary impact of interest rates simply isn’t enough to compel major changes to a long-term financial plan. A strategic plan is built to reach your desired destination whether rates are rising or falling, because rates, like the weather, are always changing and hard to predict over the long term.