Rising interest rates: How the Fed’s rate hike will affect you

Here’s how interest rates work and what rising rates mean for you.

WASHINGTON — The Federal Reserve raised interest rates a quarter point on Wednesday.

The mere mention of the words “raised” and “rate” in the same sentence may scare most people off, but the decision to raise interest rates is not taken lightly. So what is a Fed rate hike and what does it mean for you?

To slow down

Interest rates determine the amount of interest you are charged on a loan. Changing these interest rates is one of the tools the Federal Reserve has to control inflation or rising commodity prices.

Right now, inflation is at its highest level in 40 years, so the Fed needs to bring prices down.

To do that, they have to slow down the whole economy and get people to stop buying things. Once companies stop selling as much stuff as easily as they have been, they can lower prices to entice people to come back (which is an oversimplification, but usually what happens).

So when the federal authorities set higher interest rates, it costs you more to borrow money to buy things. For this reason, some people will not take out loans.

Cars, houses and credit cards

Interest rates affect all sectors of the economy.

Auto loans are dictated by interest rates. By increasing the rate, the car loan becomes more expensive and fewer people will be eligible to buy a car.

The same goes for credit cards, as the monthly payments for anything you charge a new credit card will also increase.

When interest rates on residential mortgages rise, fewer people qualify for a mortgage.

Real estate experts say this means the Arizona real estate market will cool down a bit.

“You’re going to start seeing fewer multiple offers,” said new Arizona Association of Realtors Association president Eric Gibbs. “Purchasing power is shrinking right in front of us.”

Gibbs said the market for luxury or high-end real estate is likely to remain strong, but first-time home buyers are likely to be hit the hardest.

But if people don’t buy as many houses, they still have to live somewhere. Gibbs said higher interest rates likely mean rents will rise and rental properties will be scarcer.

“The possibility of getting a rental is going to be really difficult, even more so now,” Gibbs said.

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“The Federal Reserve is really pushing the publicity on this,” said ASU economist Lee McPheters. “They say, ‘hey, we’re at work.'”

And McPheters said the perception that federal authorities are doing something about inflation may actually help make it true.

McPheters said a quarter-point hike in interest rates isn’t really much, but it can help employers believe that employees won’t want increases to keep up with inflation. If employees don’t want more money, companies don’t have to raise prices, which sets off a cycle of inflation.

“You know, it’s not really going to make a big difference,” McPheters said. “But it really affects people’s view of what might happen to us.”

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