The Federal Reserve Hiked Interest Rates Again. Here's What That Means for You

This decision will affect just about everyone with a bank account.

The Federal Reserve announced yesterday that it was raising the federal funds rate by 0.25%, as many speculated it would. It hopes that doing so will help curb inflation, but many Americans aren't clear as to how this works or how it will affect them personally. So here's a quick rundown on what you need to know.

What is the federal funds rate?

The federal funds rate is the rate that financial institutions charge each other in order to borrow money. Prior to this most recent meeting, the federal funds rate sat between 4.50% and 4.75%. It's now at 4.75% to 5%. So essentially, it's becoming more expensive for banks to borrow money from one another.

The reason that matters for you is because the interest rates on consumer-facing products, like savings accounts and loans, are based on the federal funds rate. A Fed rate hike typically leads to:

• Higher yields on savings products: Annual percentage yields (APYs) on savings accounts, money market accounts, and certificates of deposit (CDs) generally rise after a Fed rate hike. This enables savers to earn more interest on their extra cash.
• More costly loans: A Fed rate hike also raises annual percentage rates (APRs) that borrowers pay on loans. That means you'll pay more in interest over the course of your loan term. This can also discourage some from borrowing money in the first place.

These changes won't happen overnight. It typically takes a few days to a few weeks for consumers to start seeing these changes to their banking products. But it's still useful to know what might be on the horizon.

Why is the Fed raising rates again?

The Federal Reserve has raised the federal funds rate nine times since March 2022 in an effort to curb the high inflation we've all been dealing with. The logic here is that raising the federal funds rate -- and by extension, loan interest rates -- will help curb borrowing and spending. This will in turn slow down the economy, and with lower demand for goods and services, the inflation rate will also slow down.

But not everyone agrees that this is the right move. When the Fed raises rates too much too quickly, it could trigger a recession, which could be devastating to Americans of all backgrounds.

We can't know at this point whether this will happen. We have to wait to see what the effects of this most recent rate hike are and what the Fed decides to do in subsequent meetings throughout 2023. But consumers should be aware that borrowing money could be more difficult and expensive in the future. And those with credit card debt could also find themselves struggling more under the weight of rising APRs.

In situations like these, it's best to build up your personal savings as much as you're able to. Aim to have an emergency fund that can cover at least three months of living expenses. And if you plan to take out a loan, try to save up as much as you can on your own to reduce how much you need to borrow.

You should also consider opening a high-yield savings account if you don't already have one. These accounts are already offering interest rates well above the national average, and they could climb even higher in the coming months. It's possible to earn tens or even hundreds of dollars a year in interest with one of these, and that could help to partially offset the rising cost of borrowing money for some.