The Fed announced its highest interest rate hike in 28 years. Here’s what it means for your wallet

The Federal Reserve hiked its benchmark funds rate by 0.75 percentage points Wednesday in an especially aggressive attempt to lessen inflation’s persistent sting. It’s the third interest rate increase this year and the highest rate hike in almost three decades.

Many experts originally expected a 0.50 percentage point increase this week, and Federal Reserve Chair Jerome Powell said at the May meeting that the agency was not considering a 0.75 hike. But with May’s higher-than-expected inflation report, the central bank stepped up its efforts to try to tame rising costs.

To simplify the thinking: Higher interest rates theoretically dampen demand for goods and services, which in turn helps costs from spiraling further upward. Experts expect the Fed to continue raising rates through the end of the year.

Americans will feel the effects of this increase across their financial lives, from their savings accounts to debt repayments. Here’s what to know.

Debt will get more expensive

The interest rate on credit card debt and other variable-rate products will likely increase in the coming weeks and months. Lenders have already been increasing credit card APRs since the previous rate hike.

Likewise, interest rates on car and home loans may keep climbing. If there’s no rush on your end, it may make sense to put off larger purchases until things settle down. Then again, if you’re in a rush to buy a home—because say, your rent is also rising and you’re ready to move on—then it could be prudent to lock in a rate now, or as soon as possible, before they rise even more.

Savings rates may improve

While debt gets more expensive, savings account APYs may also rise in the coming weeks and months. After a few years of piddling returns, this can be a boon for savers.

Experts say online banks—like Ally—typically offer higher rates faster than traditional brick-and-mortar banks. Credit unions also offer competitive rates. Though the national average savings rate is currently 0.07%, some banks are already raising rates and offering more generous yields, according to Ken Tumin, the founder of DepositAccounts.com, who tracks account offerings.

Online savings account rates are rising

Latest major online bank to hike:@CapitalOne 360 Performance Savings APY:

0.80% → 0.90%

It’s now 50 bps above its bottom of 0.40% that lasted all of 2021 and Q1 of 2022.Https://t.co/a4mnkknmNK pic.twitter.com/jC5F9mCF95

— Ken Tumin (@KenTumin) June 15, 2022

Some online banks and credit unions “continue to aggressively increase their CD rates, and that appears to be accelerating,” Tumin notes. It’s likely those rates will continue to rise as well. Rates for some 1-year CDs are hitting 2%, while longer-term products are reaching 3%.

None of those options will help you keep up with inflation, which reached 8.6% in May. But it’s still best to keep your emergency fund in a liquid savings account you can easily access when needed.

The stock market is falling

Inflation and news that the Fed might increase rates more than expected sent the S&P 500 officially into bear market territory earlier this week, with the index falling more than 20% from its peak in January.

That can be painful for retirees counting on their investments to cover their expenses. But younger investors need not worry too much. Bear markets happen regularly; the worst thing any investor can do is make rash decisions now they’ll come to regret later.

“The most important thing is don’t panic, and don’t panic sell,” says Douglas Boneparth, certified financial planner and president of Bone Fide Wealth.

Prioritize carefully

With all of the changes happening, it might make sense to rethink and rearrange your financial priorities. While buying a house may have been attractive for the past two years with rates at record lows, the math could look very different now.

If paying off high-interest debt wasn’t a priority before, it definitely should be now. With the Fed expected to keep increasing rates throughout the year, that debt will only get more and more expensive. Paying it off as soon as you can will have compounding returns.