Fed Raises Rates by 0.75%. Here's What That Means for Borrowers

Consumers could be impacted in more ways than one.

For months on end, inflation has been rampant. And consumers have been struggling to pay for essentials like gas, groceries, and utilities. The problem has gotten so bad that many people are depleting their savings and racking up credit card debt just to stay afloat.

Meanwhile, the Federal Reserve just took a huge step to help combat inflation -- it hiked interest rates by three-quarters of a percentage point. That’s the largest rate hike since 1994. And it means that borrowing is about to get a lot more expensive.

Consumers should prepare to pay up

Let’s clear up one thing -- the Fed doesn’t actually set consumer interest rates. So when we talk about rate hikes, we’re referring to the federal funds rate, which is the rate banks charge one another for short-term loans.

But when the federal funds rate rises, consumer interest rates tend to follow suit. And that can be both a good and bad thing.

Consumers with money in savings accounts can benefit from higher interest rates. But those seeking to borrow money could get stuck paying more in the form of higher mortgage rates, personal loan rates, and so forth.

Higher interest rates can also spell trouble for borrowers with variable interest rates on their debt. That means consumers with credit card balances and HELOCs could see their interest rates rise.

Will rate hikes cool down inflation?

The reason living costs are up so much right now is that the supply of available goods hasn't been sufficient enough to meet buyer demand. That’s because unemployment levels have been low for a while, and between steady earnings and leftover stimulus funds, consumers have had more money to spend.

If borrowing rates increase, consumers might start spending less. That could help supply catch up to demand. And once that happens, prices should start to come down.

Now, if consumer spending declines to a certain point, it could actually trigger a recession. And that’s not ideal. As such, the Fed’s drastic interest rate hike is regarded by some as too extreme. But given how much inflation has soared, it’s also easy to argue that it’s a necessary measure.

In May, the Consumer Price Index was up 8.6% on an annual basis, according to the Labor Department. That‘s a level of inflation the Fed can’t ignore. And raising interest rates is really the only weapon it has in its arsenal to help what’s become a major crisis for everyday consumers.

Still, we can take steps to avoid getting hurt by rising rates. Those with credit card balances, for example, should aim to pay them off as quickly as possible. Waiting could mean getting stuck paying more interest. Similarly, those looking to lock in a fixed-rate loan may want to get moving as soon as possible -- before borrowing rates really begin to soar.

Mortgage borrowers with adjustable-rate loans may also want to look at refinancing over to a fixed-rate loan. Granted, mortgage rates are high right now across the board, but at least that way, borrowers know what rate they're in for.