How the highest interest rate increase since 1994 could impact you

LINCOLN, Neb. (KLKN) – Inflation is the highest it’s been in 40 years, and the federal interest rate has also had the largest single increase in nearly three decades.

A Lincoln financial adviser said there is not a direct link between the Federal Reserve interest rate and the interest rates that we pay, but they do go hand in hand in several ways.

“Overall, higher interest rates mean it’s going to cost more to borrow money,” said Eli Mardock, a financial adviser at Stonebridge. “So for consumers, if you have higher credit card debt, you might see a higher rate on your statements. If you are paying your payments off every month, you’re not really going to notice it, and that’s great, but most Americans have a lot of credit card debt, so those small rate hikes have an effect and add up and snowball against you over time.”

Last month, the Fed raised its rate by three-quarters of a point, to a range of 1.5% to 1.75%, the largest increase since 1994.

Why? Because inflation is so high.

“You have this 40-year-high inflation that we had in quarter 1, and hopefully, it will start to slow down a bit, and that’s what these interest rate hikes are designed to do, but it’s really caused consumer debt to skyrocket.” Mardock said. “More and more people are putting money on their credit cards, putting gas on their credit cards. That can be tough with these rate hikes because they will be paying more and interest rates will go up.”

One shopper at Hy-Vee told Channel 8 that inflation has caused him to change his spending habits.

“I’ve definitely been using my credit card more for stuff like gas and groceries,” he said.

Mardock said that’s hurting one age group a little more than others.

“Consumer debt in the U.S. actually increased by $300 billion in the first quarter of 2022,” he said.

And people in their 40s have the highest share of debt, so they are the most affected by rising interest rates, Mardock said.

Yet there are some positive signs.

This week, mortgage rates fell the most since 2008, from 5.7% to 5.3%, Mardock said.

“But still, overall, the mortgage rates are higher than they have been,” he said.

For older Americans, a high interest rate could be good for investments such as certificates of deposit or savings accounts, but Mardock said it’s still a net negative.

“You’d expect that since we are paying more in interest that we would be earning more in interest in our savings account, CDs, stuff like that,” he said. “But it hasn’t really turned out that way.”

Economists are predicting that the Federal Reserve interest rate will be around 3.5% by the end of the year.