Bloomberg/Contributor/Getty ImagesThe Federal Reserve announced that its raising interest rates by 0.25 percentage point, following its Jan. 31-Feb. 1 meeting, bumping the federal funds rate to a target range of 4.5 to 4.75 percent. With the move, the Federal Reserve marked the eighth straight meeting that it raised rates in an effort to rapidly reduce liquidity to the financial markets and tamp down high inflation.

The Fed’s decision comes as inflation hit 6.5 percent in December 2022, still among the highest levels in decades. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is how much further will the Fed raise rates and how deep an ensuing recession may become.

“While inflation pressures have started easing, the Fed’s work isn’t done,” says Greg McBride, CFA, Bankrate chief financial analyst. “Interest rates are moving higher and may stay there longer than is generally believed.”

Besides raising interest rates, the Fed has also been selling off huge chunks of its bond portfolio. As the Fed runs off its balance sheet, the move helps drain liquidity from the financial system in an effort to slow inflation.

At about 3.5 percent, the 10-year Treasury note is now well below its 52-week high of 4.33 percent, which was hit just in October. The move lower in that yield even as the Fed continues to raise short-term rates suggests that investors are preparing for a recession in the near term.

As the Fed continues to raise rates, here are the winners and losers from its latest decision.

1. Savings accounts and CDsRising interest rates mean that banks will offer rising returns on their savings and money market accounts, but the speed with which they do this will vary from bank to bank.

“The combination of rising interest rates and easing inflation is the best of both worlds for savers,” says McBride. “The top-yielding savings accounts, money market accounts and CDs are well over 4 percent and most are still rising. But earning 4-4.5 percent looks all the better once inflation comes down below that level and keeps falling.”

Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions, where rates are typically much better than those offered by traditional banks.

When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

“Consider locking in longer-term CDs as the yields on multi-year maturities are peaking now,” says McBride. “Yields on short-term CDs, savings accounts and money market accounts have a bit more room to run.”

2. MortgagesWhile the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling from its highest levels in recent months, as the market prices in the potential for a recession, mortgage rates have sharply fallen alongside them.

“With inflation having peaked and now easing back, we’re seeing the same with mortgage rates,” says McBride. “After moving above 7 percent in October, the average 30-year fixed-rate mortgage has fallen to 6.4 percent. With the Fed hiking rates, this could – counterintuitively – lead mortgage rates lower as it puts a further clamp on inflation and slows the economy even more. Lower inflation and slower economic growth are both suggestive of lower mortgage rates.”

Mortgage rates remain well above where they were a year ago, and this – following the rapid rise in housing prices over the past couple of years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

The cost of a home equity line of credit (HELOC) will be ratcheting higher since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the prime rate, the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will see rates tick up. As rates rise, it can be a good time to comparison-shop for the best rate.

3. Stock and bond investorsThe stock market soared as long as the Fed kept rates at near zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs.

Since late 2021, investors have been pricing in rate increases, and the S&P 500 spent most of 2022 in a deep slump. Now with the 10-year Treasury moderating, investors have sent stocks higher in the last few months because they think they can see the end of rate hikes. Still, higher rates should slow growth and therefore corporate earnings, if not create an outright recession.

“Higher rates will be a headwind for corporate earnings, which ultimately drive stock prices,” says McBride. “As in recent previous episodes, Fed Chair Jerome Powell may need to send a stern message that interest rates will be higher, and for longer, than what investors think. This would be a recipe for renewed volatility.”

For most of 2022, higher rates hit bonds hard, pushing their prices down. The longer the bond’s maturity, the more it’s been stung by rising rates. However, now with investors starting to spot an end to the Fed’s aggressive tightening, the bond market has been finding a floor on prices. But with the economy yet to endure an expected recession, stocks may still be in for a choppy ride.

Now short-term rates are much more attractive if you’re looking for a safe place to stash money while waiting for things to cool off.

The Fed’s ongoing reduction in its own bond portfolio should further decrease support for stocks, bonds and even cryptocurrency.

4. BorrowersIf you’re an existing borrower and don’t need to tap the market for money – say, you locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But everyone else who’s looking to access new credit is getting squeezed, whether that’s credit cards (more later), student loans, personal loans, auto loans or whatever else you might need to borrow for.

The average interest rate on personal loans is 10.6 percent, as of Jan. 25, according to a Bankrate study. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent, when the fed funds rate was near zero.

Besides these new borrowers, however, anyone with any kind of floating-rate debt is also feeling the sting of higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment.

5. Credit cardsMany variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will move higher now. Rates on cards are already at multi-decade highs and are still rising.

“Credit card rates will mimic this and any further Fed rate hikes, with credit card rates that are already at a record high poised to move still higher,” says McBride. “Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind.”

Rates on credit cards are largely a non-issue if you’re not running a balance.

6. The U.S. federal governmentWith the national debt above $31 trillion, rising rates will raise the costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.

As long as inflation remains higher than interest rates, the government is slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt.

Bottom lineInflation has been running hot over the last couple of years, and the Fed is aggressively raising interest rates to combat it. So plan carefully for how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs. One option for those looking for some protection against inflation is the Series I bond, which offers a solid annual interest rate of 6.89 percent through April 2023.
Click Here To Get Funded!