The Impact of a Fed Interest Rate Hike

After its meeting in June 2018, the Federal Reserve decided to hike its federal funds rate target range by a quarter point to 1.75%-2.00%.

When interest rates increase, there are real-world effects on the ways that consumers and businesses can access credit to make necessary purchases and plan their finances. This article explores how consumers will pay more for the capital required to make purchases and why businesses will face higher costs tied to expanding their operations and funding payrolls when the Federal Reserve increases the target rate. However, the preceding entities are not the only ones that suffer due to higher costs, as this article explains.

The following provides a breakdown of what consumers and businesses can expect as a result of the Federal Reserve’s recent interest rate increase.

Things that Traditionally Increase when the Fed Increases Interest Rates

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

The Prime Rate

A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.

Credit Card Rates

Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.

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