Morning commuters ride a water taxi up the Chicago River to Michigan Avenue in Chicago. No matter your age, what the Federal Reserve does to interest rates will most likely affect you. (M. Spencer Green / AP file)

Morning commuters ride a water taxi up the Chicago River to Michigan Avenue in Chicago. No matter your age, what the Federal Reserve does to interest rates will most likely affect you. (M. Spencer Green / AP file)

What a Fed rate hike means for you, at any age

The central bank raised what’s called the federal funds rate by a quarter of a percentage point.

  • Wednesday, September 26, 2018 12:21pm
  • Herald Business Journal

By Sarah Skidmore Sell and Stan Choe / Associated Press

No matter your age, what the Federal Reserve does to interest rates will most likely affect you.

The central bank raised what’s called the federal funds rate by a quarter of a percentage point to a range of 2 percent to 2.25 percent Wednesday, the third such increase this year.

An increase creates a ripple effect for rates on a variety of loans and investments.

Higher rates can mean different things to people, depending on where they are in life. In general, for people borrowing money, it means life is getting more expensive. For savers, it means slightly bigger rewards. Here’s a look at some of the effects:

For 20-somethings

What’s rising even faster than college tuitions? The financing costs to pay for them.

Student-loan rates have been climbing along with the yield on the 10-year Treasury note, which has risen above 3 percent. Undergraduate students taking out federal direct loans this school year will pay a fixed 5.05 percent interest rate. That’s a significant jump from the 4.45 percent rate of the prior school year, and it’s the highest since 2009-10, when it was 5.6 percent.

The rate is fixed, so direct federal loans taken out for the 2018-19 academic year will keep the 5.05 percent rate. The Fed reiterated Wednesday that it expects to raise rates one more time this year and another three times in 2019. Unless that changes, long-term rates would also rise, so student loans taken out next year will likely have a higher rate.

Interest rates for private loans are already traditionally higher and will likely rise as well.

Additionally, it’s easy in your 20s to start to slide down the slippery slope of credit card debt. Try to resist because carrying a balance is only going to get more expensive ahead.

Credit card rates are most sensitive to changes in the federal funds rate, almost directly matching the rate change with a 1.92-point increase since late 2015 when the Fed began to hike rates, said Nick Clements, co-founder of, a financial information website.

Clements estimates that with this latest hike, the average household that carries credit card debt month to month will pay over $150 in extra interest per year compared with before the rate hikes began. MagnifyMoney estimates 122 million Americans carry credit card debt month to month.

For young-ish) workers — 30s and 40s

It’s a busy time financially — people in this age group may be focused on paying down debts such as auto loans, mortgages and student loans while also trying to stoke their savings.

Pay off any variable-rate debts ASAP. That means paying down credit cards, home equity lines of credit and student loans from private lenders as quickly as possible before these borrowing costs rise.

To put this in perspective, since the Fed began raising rates, the average credit card rate has jumped from 15.78 percent to 17.32 percent; the average home equity line of credit has climbed from 4.75 percent to 6.08 percent, according to And those with adjustable rate mortgages expecting a rate reset this year will see the rate jump to 5.25 percent or more.

Speaking of mortgages, because interest rates are on an upward trajectory, new mortgage debt will also most likely be getting more expensive.

The fed funds rate and mortgages don’t always move in lockstep for a number of reasons. But since late 2015, the average 30-year fixed mortgage rate has increased from approximately 3.9 percent to 4.6 percent, as of Sept. 13.

If you are looking for a mortgage, shop around for the best rate. If you have an adjustable rate mortgage that is expected to reset higher soon, consider refinancing to a lower fixed-rate now.

Meanwhile, members of this group should also save for retirement and build up their emergency savings. For the latter, consider banking online, where you can find numerous savings accounts with rates around 2 percent.

For near-retirement or retired — 50, 60, 70 and beyond

Huzzah. Savers are finally earning more on their cash — if only just a bit.

The national rate for a 12-month CD is 0.45 percent, according to the Federal Deposit Insurance Corp. That sounds like a pittance of interest, but it’s double the rate from a couple of years ago.

Rates for longer-term CDs are also rising, and the national rate for a five-year CD is up to 1.11 percent from 0.87 percent a year ago.

Such low figures mean many savers still aren’t keeping up with inflation, but analysts expect rates to continue trending higher. Savers can also typically find better rates at online banks than at traditional ones — they sometimes even match the rate of inflation, which was 2.7 percent last month. For a three-year CD, several online banks offer rates at that level or slightly higher.

Now on to those investments you worked so hard on.

Higher interest rates hurt investors with bond funds in their 401(k) accounts, at least in the short term. A rise in rates makes the bonds sitting in a bond fund’s portfolio suddenly less attractive, when compared against newly issued bonds that are paying more in interest. That causes those bonds’ prices to drop, and the dynamic has caused many of the most popular bond funds to lose money this year.

The largest bond fund by assets is down 2.1 percent through Monday, for example. But those funds will also be earning more in interest thanks to the higher rates and should be able to offset those losses in the long run, as long as rates rise gradually.

Stock funds should also feel an effect, and emerging-market funds have been among the biggest losers recently. But as long as the rise in rates is due to a strengthening economy, rather than fears about a surge in inflation, analysts say stock funds should be able to hold steady. That’s because a better economy usually spells higher corporate profits.

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