Once again, the Federal Reserve decides to raise interest rates.
In a significant move, the Federal Reserve made an announcement on Wednesday regarding the increase of interest rates by a quarter percentage point (equivalent to 25 basis points), reaching a 22-year high. This decision signifies a continuation of the upward trajectory that interest rates have been following for the past year, as the Fed strives to combat the persistent threat of inflation.
What is the impact on you?
The prime rate, often considered the most favorable interest rate available for financing, is subject to fluctuations based on the state of the economy. When applying for credit cards or bank loans, lenders determine the interest rate based on the prime rate and the level of risk you present as a borrower.
The prime rate, which is influenced by the federal funds rate set by the Federal Reserve, undergoes regular adjustments based on the economy's current conditions. With rapidly rising fuel and food prices, the Fed has implemented eleven increases in the federal funds rate since 2022, aiming to combat inflation and discourage consumer spending. But what does this mean for you?
For those unable or unwilling to bear the burden of increased payments resulting from a higher prime rate, the postponement of financing-dependent projects becomes inevitable. The escalating prime rates have a profound impact on various sectors, including stock and bond markets, credit cards, personal loans, student loans, auto loans, and business loans. Furthermore, these higher rates serve as an encouragement for individuals to save money, effectively reducing the supply of circulating funds and potentially leading to a decrease in inflation.
To learn more about the Fed's Interest Rate Decisions, you can read this article written by Taylor Tepper, Forbes advisor staff. https://www.forbes.com/advisor/investing/fed-funds-rate-history/