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Fed issues largest rate hike in 28 years

Fed issues largest rate hike in 28 years

MDart10 / Shutterstock.com The Federal Reserve on Wednesday increased its target rate of federal funds by 0.75 percentage points, the largest increas

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Federal Reserve
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The Federal Reserve on Wednesday increased its target rate of federal funds by 0.75 percentage points, the largest increase since 1994.

The increase – which brings the target rate on a range of 1.5% to 1.75% – is not expected to be the last such move this year. In fact, multiple additional interest rate hikes are forecast for the rest of 2022 as the country’s central bank tries to curb rising inflation.

As we have explained in the past, every time the Federal Reserve raises (or lowers) the federal fund rate – which is the rate that banks charge other banks for short-term loans – it hurts some Americans and helps others. Everyone from savers to those with credit card debt can feel the consequences.

But you may be less aware of how a rising federal fund rate is affecting your retirement. Here are some examples of how Wednesday’s rate hike – and those likely to follow – could ripple through your golden years.

1. Retirees may be able to earn more on savings

Happy older woman with money.
Ljupco Smokovski / Shutterstock.com

Since at least the time of the Great Recession more than a decade ago, savers have struggled.

The federal fund rate has remained low throughout the period, especially when judged against historical norms. And when the federal fund rate is low, banks almost always offer meager rates of return on savings accounts and deposit certificates (CDs).

When the federal fund rate is closer to 5% or more, retirees who want to play safe can park their money in a bank and expect a decent return. Those days are long gone – again, even after today’s increase, the target range for the federal fund rate is only 1.5% to 1.75%.

But as the Federal Reserve continues to raise the federal fund rate, so should rates on savings accounts and CDs.

In fact, at some banks, especially online banks – which tend to be more competitive – rates are already rising, as we reported in May.

So through the coming cycle of Fed rate hikes, stop by Money Talks News’ Solutions Center regularly and compare savings accounts to see if you can earn more.

2. Shares can become more volatile

Retirement checking his portfolio
astarot / Shutterstock.com

Trying to guess where the stock market is going is a fool. No matter what the experts tell you on CNBC, no one knows when stocks will rise or fall.

And yet we know that rising interest rates tend to cool the economy. For example, as the rate of federal funds rises, companies find it more expensive to borrow, which can limit their growth – and, by extension, economic growth in general.

This could send stocks lower. Or it may not be – stocks are already in a bear market. Again, no one can tell you the future.

But if even the mere possibility of sinking stocks sends you into a quandary – especially during retirement, when you are dependent on a portfolio to pay the bills – now take a few steps to calm your fears.

Look at your asset allocation and make sure you are comfortable with how much money you have in the stock market. If not, decide if you need to make adjustments to make your investments storm-proof.

If the idea that you need to adjust your asset allocation sends you from creepy to utter panic, stop by Money Talks News’ Solutions Center and find a financial advisor who can help you with the process.

3. Debt for all age groups will become more expensive

Elderly man holding an empty wallet
Timofey Zadvornov / Shutterstock.com

When the federal funds rate rises, lenders are only too happy to follow their example by increasing the rates they charge on credit card debt. This means that if you are a retiree with credit card debt – or anyone else who carries a balance from month to month – the cost of borrowing will increase soon, if it has not already started.

Those with adjustable rate mortgages or home equity lines (HELOCs) may also find themselves in the same boat. This is because such types of debt, such as credit cards, have variable rates rather than fixed rates.

For tips on eliminating debt before rising rates, read “8 Surefire Ways to Get Rid of Debt As Soon As Possible.”

4. Your retirement dream home may slip away

Unhappy senior couple doing tax
Cat Box / Shutterstock.com

Some people suggest that there is a one-to-one relationship between increases in the federal fund rate and rising mortgage rates. While this is an exaggeration, there is an element of truth to the idea.

When the Federal Reserve raises the federal fund rate, it becomes more expensive for banks to borrow from each other. Those costs are passed on to lenders, including those seeking mortgages.

Thus, although the two types of interest rates are not moving in the barrage, it is likely that as the federal fund rate rises, mortgage rates will also continue to rise.

Homes are already at or near record high prices in some parts of the country. If you were hoping to buy a dream home for retirement, rising mortgage rates could put that home out of financial reach. (Rising mortgage rates, however, do not affect existing fixed rate mortgages: This means higher interest rates on new bandages.)

For more considerations, look at “6 Things You Need to Know About Buying a Home in Retirement.”

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