The Fed Has Signaled Rate Hikes for 2022. Here's How That Could Impact Consumers

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Consumer rates could be on the rise in the coming year, which can be both good and bad.

Key points

  • Though the Federal Reserve doesn't set consumer interest rates, it influences them.
  • Borrowing could get more expensive in the coming year, but banks could start to pay a little bit more.

It's a common misconception the Federal Reserve dictates the rates that consumers pay on loans and credit cards, and the rates they get on their savings in the bank. The Federal Reserve is in charge of setting the federal funds rate, which is the rate banks charge one another for short-term borrowing.

But when the federal funds rate rises, it tends to influence consumer interest rates. And that's precisely what may happen in the coming year.

The Federal Reserve plans to speed up the tapering of its bond buying program next year. That could then lead to an increase in the federal funds rate and influence consumer interest rates as well. Here are some of the changes consumers should gear up for in light of that.

1. Higher mortgage rates

Mortgage rates aren't set by the Federal Reserve, but they're influenced by the general economy. Those looking to buy a home in the coming year could face higher borrowing costs than what mortgage applicants are seeing today.

That said, right now, mortgage rates are sitting near historic lows. A modest hike in rates won't necessarily make borrowing for a home unaffordable. But still, it's a trend prospective buyers should look out for -- especially given today's ultra-high home prices.

Furthermore, homeowners who have an adjustable-rate mortgage could see their borrowing costs start to climb in the coming year. Those worried about a significant rate hike may want to think about refinancing to a fixed loan, which offers predictable monthly payments.

2. Higher credit card interest rates

Credit cards commonly come with a variable interest rate. This means if you're carrying a balance on your cards, the amount of interest you pay on it can fluctuate.

Once the Federal Reserve raises its rates, we could see credit card interest rates follow suit. That would be bad news for consumers who rack up balances during the holiday, or who carry existing balances into the new year. You may want to try to whittle down your current debt before that happens.

3. Higher savings account rates

Rising mortgage and credit card interest rates could hurt consumers. But one area where they might benefit modestly is an uptick in savings account and CD rates.

Right now, savings account and CD rates are, for the most part, abysmal. And the Federal Reserve's decision may only move rates upward a little bit. But still, consumers are advised to keep the money they've accumulated for emergencies in a savings account, where that principal is protected. If you have a pile of cash in savings, next year, your interest income could rise ever so slightly.

Prepare for some changes

All of the above changes won't take effect overnight in the new year, so you don't need to panic in light of them. But it could pay to assess your financial situation and see if it pays to take action, whether it's refinancing your mortgage or consolidating your credit card debt via a balance transfer and locking in a 0% introductory APR while you aggressively chip away at that total.

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