Fed Keeps Rates High! Now What?

The Federal Reserve has kept interest rates high as it tries to reduce inflation rates.

Let's break down the following:
1. How Do High Interest Rates Affect Your Life.
2. What Impact Do High Rates Have On Mortgages.
3. What Should You Do Today Because of High Rates.

The Federal Reserve has increased interest rates to try and help reduce inflation. Inflation is the steady increase in price to purchase something. Typically the Federal Reserve targets a 2% inflation rate. Lately we have been much higher.

Inflation can occur because of a number of things. It can be simple economics where Demand for an item is larger than Supply. When this occurs the price will increase.

Inflation can also occur by the addition of new currency in to an economy. This happened in an extreme fashion during Covid. The government added new money in the market via "stimulus" packages. When new money is added to an economy the value of the existing money is diluted. This means your money is now worth less as the market adjusts to more money being in the economy and prices are raised.

To try and reduce inflation the Federal Reserve increases interest rates. What this does is reduces the amount of borrowing happening. When people borrow less money they spend less money. This reduces demand and in return prices begin to decrease.

This means as consumers high interest rates should eventually slow inflation, but that means borrowing money is more expensive.

This can be seen in the housing market. Mortgage rates in 2020 were 2.7%, while mortgage rates today at 7%. This has a huge impact on a monthly mortgage payment. If you were to finance $300,000 in 2020 vs 2024 you would be paying an additional $800 a month on your mortgage in 2024.

The one positive impact that higher interest rates have is that High Yield Savings accounts will pay more interest on your deposits.

Things you can do now:
1. Don't spend money you don't need to. Be frugal, save money, avoid debt except on a reasonable house.
2. Open a high yield savings account.