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The impact the Federal Reserve's interest rate hike will have on you

The price of new mortgages will jump, and variable rates—like your credit card APR—are where you'll notice changes right away.

CLEVELAND — For a house, a car, or simply using your credit card, borrowing is about to get more expensive.

"Inflation is much too high, and we understand the hardship it is causing," Federal Reserve Chairman Jerome Powell said Wednesday. "We're moving expeditiously to bring it back down.”

The Federal Reserve is bumping the federal fund rate by 1/2 a percent, the most in 22 years. Currently, inflation is at 8.5%, the highest in more than four decades.

"Things are getting much more expensive much faster, as most people have noticed when you go to buy groceries or get gas, things like that," Dr. Jonathan Ernest, an assistant economics professor at Case Western Reserve University's Weatherhead School of Management, explained. "The Federal Reserve is trying to pull the reins in on that a bit."

Inflation is influenced by both limited supply—think supply chain shortages—and increased demand. The Fed is trying to control demand, i.e. make it less desirable to finance a new house or car due to increased interest rates.

For example, a $5,000 loan will now cost an additional $193 in total interest. The fewer people who buy, demand drops.

"That keeps prices down, but it also slows down the economy, because we're not producing and buying as many things as we were," Ernest said. "Everybody was going out and really participating full-force in the economy."

And that can lead to recession, but Powell says there's "nothing" to suggest one is close. In the meantime, the price of new mortgages will jump, and variable rates—like your credit card APR—are where you'll notice changes right away.

"If you have any credit card debt—which on average people have a fair amount of—now might be a really good time to try to pay down some of that debt," Ernest warned. "Most ARMS adjust once a year, but home equity loans adjust right away. Federal student loans are fixed, but private may not be."

One positive? Eventually, your savings account might earn a little more interest.

"In general, it looks like they're gonna continue to slowly ratchet these rates up," Ernest told 3News.

Doing this gradually will hopefully keep the economy humming, but Ernest says the reality is this doesn't fix the war in Ukraine or any other supply-side crunches.

"Higher interest rates [don't] suddenly fixed supply chains or increase the amount of oil or natural gas flowing into a country, or something like that," he admitted.

While it may help, the real impact on inflation could be "Wait and see."


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