Preparing for Fed Rate Changes in 2022

A series of electronic charts and graphs meant to represent an analysis of interest rates.

How and when do Federal rate changes impact your deposit rates?

In an attempt to cool the economy and combat spiking inflation, the Federal Reserve announced that it’s expecting to raise rates at least four times in 2022. Projections estimate the first hike in March will be 0.25-0.50% with all signs pointing to the latter. What does this mean to you as both a borrower and an investor?

Federal Rate Change Impact on Borrowing
Historically, you will see an instantaneous increase on your variable rate loans—consumer and commercial. Fixed-rate loans will remain unchanged. Repayments on loans with variable rates, such as adjustable-rate mortgages (ARMs), could become more costly in a rising rate environment. Rate increases could also make it more challenging for new homebuyers to qualify for mortgages.

Borrowers may want to consider refinancing variable rate loans to lock in a fixed rate, so payments are easier to manage. Credit card providers will also increase interest rates, which could affect your monthly payments for those who carry balances. Paying down credit card balances could be beneficial to your budget before rates increase.

Federal Rate Change Impact on Investing
The big question on everyone’s mind is… How will the Federal rate increases affect retirement planning? The national average interest rate on savings accounts is 0.06%. Fixed rate savings such as annuities and short-term bond yields will rise in 2022. Volatility in the market due to the expected hikes have pushed some investors towards safer investments such as dividend stocks and gold exchange-traded funds.

Increases in bank deposit rates tend to lag behind following a Federal rate hike. Why? A financial institution’s profitability is measured by its “cost of funds”. In layman’s terms… How much does it cost a bank to retain deposits? Banks want to retain a low cost of funds for as long as possible. They can achieve this by raising lending rates and maintaining deposit rates (among other factors). Banks may also take longer to respond to Fed increases because they are flush with cash and do not need to raise rates to attract new deposits.

ADM Impact on Banking Relationships
ADM is continuously working with financial institutions (FIs) on your behalf. We leverage our relationships with these FIs to deliver some of the most competitive rates in the market. You may not see immediate increases on your deposit rates, but they will change over time. Regardless if rates are on the rise or on the decline, you have peace of mind knowing that your funds are fully protected.

We love our customers and strive to achieve client satisfaction in every rate environment. Please contact us at 414.961.6600 or if you have any questions or to discuss your account.