The Fed is raising rates. What does it mean for you?

If you've been following the news lately, you've likely heard that the Federal Reserve recently raised interest rates for the first time since 2023. The goal is to help bring inflation under control by making borrowing more expensive, which can slow spending and ease pressure on prices across the economy.

While headlines often focus on the broader economy, many people are wondering what higher rates mean for their own finances. As a financial advisor, that's one of the most common questions I hear. Higher rates can affect everything from borrowing and saving to investing and retirement planning, so understanding the potential impact can help you make more informed financial decisions.

Higher Borrowing Costs

One of the most immediate effects of rising interest rates is that borrowing money typically becomes more expensive. If you're considering purchasing a home, financing a vehicle, or taking out a private student loan, you may find that the cost of borrowing is higher than it was previously.

Think about someone shopping for a home. A higher mortgage rate doesn't just affect the percentage on the loan. It can directly impact monthly payments and, ultimately, how much house fits comfortably within their budget and long-term financial goals. Adjustable-rate mortgages tend to feel the impact most directly, while those with fixed-rate mortgages generally won't see changes to their existing loan payments. Even a relatively small increase in rates can lead to higher borrowing costs over time.

A Better Environment for Savers

While higher rates can present challenges for borrowers, they may offer some benefits for savers. For years, many people became accustomed to earning modest returns on cash sitting in savings accounts. Now, savers may finally see a more meaningful return on money they're setting aside for emergencies, vacations, or other near-term goals or expenditures.

As rates rise, financial institutions often increase the interest they pay on deposits. While savings yields still may not fully offset inflation, higher rates can make cash reserves a little more rewarding than they've been in recent years.

What It Means for Bonds

Rising interest rates can also affect the bond market. One question I often hear from clients is why their bond investments may decline in value even though bonds are generally considered more conservative investments. The reason is that bond prices and interest rates typically move in opposite directions. While that can create short-term pressure, higher rates can also create opportunities over time. As older bonds mature, investors may be able to reinvest in bonds offering more attractive yields, assuming those investments align with their risk tolerance and goals.

Increased Market Volatility

The stock market often responds quickly to changing interest rates and shifting expectations about economic growth. It's not unusual for investors to feel uneasy when headlines focus on market swings or economic uncertainty. During these periods, I often remind clients that volatility itself isn't unusual. Markets have navigated changing interest rate environments many times before.

While investors may see larger swings in portfolio values, reacting to short-term movements isn't always productive. Maintaining a disciplined, long-term investment strategy is often one of the most effective ways to navigate uncertainty.

Focus on What You Can Control

While no one can predict exactly where interest rates or markets will go next, successful financial planning isn't about forecasting every economic shift. It's about building a strategy that can adapt over time. By focusing on factors within your control, such as saving, managing debt and staying invested, you can remain on track toward your long-term goals. A financial advisor can help determine whether today's environment warrants any adjustments to your plan.

Michael D. Lanuto, CFP®, CRPC®, AWMA® is a Financial Advisor with S.M. Miller & Associates, a private wealth advisory practice of Ameriprise Financial Services, LLC. in Albany, NY.  He specializes in fee-based financial planning and asset management strategies and has been in practice for 11 years. To contact him: 518-949-2039; 4 Atrium Drive, Ste 200, Albany, NY, 12205; Michael.Lanuto@ampf.com; Request a complimentary initial financial consultation with Michael Lanuto.

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