The Truth About The Recent Fed Rate Hike

Brought to you by the EveryDollar app. Start budgeting for free today. Let's talk about this headline. We're going to throw it up on the screen for you guys. Federal Reserve hikes interest rates for the first time since 2023 amid stubborn inflation. So basically, you know, there's been a little bit of chaos happening in the world and inflation is still pretty rampant. So the Fed, one of the levers they can use is increasing the Fed funds rate. What that does is it trickles down to consumer debts, specifically things that have a variable interest rate. So let's talk about what this means, what it means for your money, and I hope it affects very few of you because you follow the Ramsey plan. So what happened? The key rate for the Fed went to 3.75 to 4%. That's up a quarter point, and that happened on September 16th, and it is the first hike since 2023 after two straight years of the Fed cutting. So they were cutting, cutting, cutting, and then inflation's hot, and they went, we got to bring it back up. The vote was unanimous. Nobody blinked. That's the whole headline. Everything's moving up a quarter point. So what does that mean for your, well, if you have a fixed rate mortgage, it means nothing. It's a fixed rate. It's not going to affect that. If you have a variable mortgage, like an arm, like we had on a previous caller, it will affect that. If you have credit card debt, that is a variable APR. So instead of 27%, it might be 27.25% now. Car loans, same thing. If you're looking to go get a new car loan, I hope you're not. I hope you're paying cash. That's going to be a little bit more expensive. So the over-under is the Fed is making borrowing more expensive to try to cool inflation. They're trying to limit how much people are borrowing, make it hurt a little more so that we spend less. Will it work? Well, they've been doing this for a while now, but it is one of the ways historically that has been used to cool inflation. So we talk credit cards, we talk car loans. Here's some good news if you're looking for it. Silver lining, high-yield savings accounts. Well, I was about to ask. Savings accounts, they're getting a bump. So if you've been following the Ramsey Plan for a decade and you have an emergency fund and a high-yield savings account, that rate suddenly went up too. So you're going to be earning more money. Exactly. So if rates are at, let's say 3% for high-yield savings accounts, you might see it go up to 3.2%. So that is a win. And it's a good reminder that wealthy people earn interest, broke people pay interest. You want to be on the right side of interest. And the problem is people have been borrowing up to their eyeballs, and rarely do they even look at the APR. They just see the shiny car, that new car smell. They swipe the card because life happened, not thinking about the ramifications of how difficult it is to pay down debt when it's at 27% APR. So if you're a Ramsey follower, you are trying to get out of debt you're currently in, not taking on any new debt, this likely won't affect you that much. And if you don't have a mortgage, this affects you zero. So here's what I want you to walk away with. This is one more reason you don't want your life dependent on debt. The Fed is going to move rates up and down forever. That's their entire job is to find the sweet spot, Goldilocks balance. But if you don't carry this consumer debt, you're not white knuckling an adjustable rate mortgage. A rate hike has a lot less power over your monthly budget. So control what you can control. That's always been the move. I can't control what the Fed does, but I can control me not going into credit card debt. So this is not for me because obviously, clearly, I know the answer. I'm asking for a friend here. Could you explain to my friend as though he was a middle schooler? I'm clearly asking for myself. How does increasing the interest rate cool inflation down? Well, if less people are borrowing money, that's going to limit the amount of spending. And so part of inflation is people are spending so much that it's bringing the inflation rate up. So if we can curb that part, less people taking out, buying new cars, less people swiping the credit cards, that will end up cooling the inflation rate overall. Their goal is 2% is the goal. And they are not quite close. And so they're just trying to move these levers. And it's not an easy task. I don't envy them. I would not want to be sitting in that seat right now because they're in the hot seat. And they're nobody's friend when they raise the rates because especially with the midterms coming up, they're going, whoa, whoa, you're making us look bad over here raising the rates. So overall, this is kind of a nothing burger in the grand scheme of life, a quarter percent. And it doesn't have a direct correlation to mortgage rates because most fixed rate mortgages are not tied to the Fed rate. It's actually tied to the bond market, to mortgage-backed securities, the 10-year treasury yield. So you're not going to see this affect mortgage rates directly. There might be a correlation slowly over time that it ticks up, but it's not going to happen overnight. So I hope that helps people understand a little bit what's going on with the Fed funds rate. Again, I don't, this is as much as I've thought about it. I don't lose sleep over this and you shouldn't either. Just keep following the Ramsey plan, control what you can control, get out of debt. Create your free every dollar budget today. The simplest way to budget for your life.