Pros, cons and how to benefit

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The Federal Reserve raised its benchmark interest rate by 0.75 percentage point on Wednesday, the biggest increase since 1994, to try to reduce today’s record inflation.

While the Fed is expected to continue raising rates through the rest of 2022, the bigger conundrum still remains: continue to raise rates, which could cause an economic slowdown and recession, or not raise rates and therefore therefore not prevent runaway inflation.

Interest rates affect our broader macroeconomic picture, but they also have a tangible effect on our personal finances, including student loans, car loans, mortgages, savings accounts, and more.

Below, Select explains in more detail the pros and cons of the Fed raising interest rates, plus how everyday consumers can take advantage.

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Pros of the Fed raising rates

The broader goal of the Fed raising interest rates is to slow economic activity, but not too much. When rates rise, meaning it becomes more expensive to borrow money, consumers react by refraining from large purchases and cutting back on spending. The idea is that in today’s high-inflation environment, this decline in consumer demand can help lower prices to “normal”.

We have seen this scenario play out a bit in the real estate market. In the last six months, the average 30-year fixed mortgage rates have gone from 3.22% on January 6 to 6.28% on June 14. apps last week. And with consumers facing higher mortgage rates to pay for a home, home prices are beginning to decline. Nearly one in five sellers have lowered the price of their home during the four-week period ending May 22, according to Redfin.

How can you benefit?

For everyday consumers, this real estate market could offer good news. Laurence Kotlikoff, an economics professor at Boston University, tells Select that mortgage rates are still at record lows (for now). In fact, a low fixed-rate mortgage can serve as a good hedge against inflation.

Not looking to buy a house? Consumers can still benefit from the expectation of more rate hikes in the coming months by refinancing any high variable-rate debt that is likely to get even more expensive. While the Fed recently announced a rate hike, it takes some time to “bake in” the market, so refinance any high-interest debt now before rates go even higher. For example, private student loan borrowers paying a high variable interest rate may want to refinance to a fixed rate to lock in what will ideally be a lower rate today than in the future. SoFi offers fixed-rate loans with loan terms of five, seven, 10, 15, and 20 years, plus origination fees to refinance.

SoFi Student Loan Refinancing

  • Cost

    No origination fees to refinance

  • Eligible loans

    Federal, Private, Graduate and Undergraduate Loans, Parent PLUS Loans, Medical and Dental Residency Loans

  • loan types

  • Variable Rates (APR)

    2.24%; from 2.37% for resident physicians/dentists (rates include 0.25% autopay discount)

  • Fixed rates (APR)

    2.99%; from 3.12% for resident physicians/dentists (rates include 0.25% autopay discount)

  • loan terms

  • loan amounts

    From $5,000; over $10,000 for medical/dental residency loans

  • Minimum credit score

  • Minimum income

  • Allow a co-signer

Cons of the Fed raising rates

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a member of the FDIC.

  • Annual Percentage Yield (APY)

  • minimum balance

    None to open; $1 to earn interest

  • monthly fee

  • Max transactions

    Up to 6 free withdrawals or transfers per statement cycle *Withdrawal limit of 6/statement cycle does not apply during the coronavirus outbreak per Regulation D

  • Excessive Transaction Fee

  • overdraft fees

  • Do you offer current account?

  • Offer ATM card?

Bottom line

Editorial note: Any opinions, analyses, reviews, or recommendations expressed in this article are solely those of Select’s editorial staff and have not been reviewed, approved, or otherwise endorsed by any third party.

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