Federal Reserve Interest Rate and What It Means for Your Budget [June 2023]
Recently, the Federal Reserve held its June 2023 meeting to decide whether or not to raise interest rates. As the country is still feeling the effects of inflation, this meeting is important for the country’s economy and your personal economy.
This post is all about the Federal Reserve interest rate June 2023 meeting and what it means for your budget.
After more than a year of raising interest rates, the Federal Reserve kept its key interest rate at 5% in its June 2023 meeting. Inflation is the reason the interest rate is holding as the Fed wants to see if it raised interest rates high enough to tame price increases.
Read more about the Federal Reserve Interest Rate June 2023 meeting here.
Federal Reserve Interest Rate June 2023
What is the Federal Reserve?
According to its own website, the Federal Reserve, or Fed is, “the central bank of the United States, [and] provides the nation with a safe, flexible, and stable monetary and financial system.” In plain speak, this means it is responsible for setting interest rates, managing the money supply, and regulating financial markets.
Okay, what does that mean?
It means that the Fed will regulate the money supply and raise and lower interest rates to keep the US economy stable. The Fed is also concerned with full employment of the US population. That typically means an unemployment rate of about 4-5%.
Read more about the responsibilities of the Federal Reserve here.
What does the Fed Chair do?
The Fed chair, appointed by the President, “act[s] as a spokesperson for the central bank, negotiate with the executive and Congress, and control the agenda of the board and FOMC meetings.” Currently, the Fed Chair is Jerome Powell. His power is also independent of Congress – meaning he does not answer to Congress directly.
What is the key interest rate?
Personal finance site, Investopedia, tells us that the key interest rate is the specific rate banks use to determine interest rates and cost of borrowing to lenders (that’s you and me). Specifically, the key rate determines the rate at which banks can borrow to maintain their reserve level.
The reserve level is the amount of money a bank must keep on hand. While in the past it was set at 10%, it is currently set to 0%. What this means is that a bank with $1 million on deposit had to keep 10% of it, or $100,000 on reserve but could lend out the other $900,000. Currently, they do not have to keep any money on hand since the percentage is set to 0.
As for the raising and lowering of interest rates, this is determined by what the outcome is. If the desired outcome is that we spend more money, then interest rates fall, and borrowing money becomes less expensive. However, if the Fed thinks we are headed toward hyperinflation (rapid, excessive, out-of-control general price increases in the economy), then it will raise interest rates to counteract inflation. Generally, the Fed accepts inflation at an annual rate of 1-2%.
You can read more about that in the Investopedia article.
What does the key interest rate mean for my budget?
There are a couple of things at work here that we need to understand when it comes to the Federal Reserve interest rate.
1. It costs to borrow money.
For most of us, we are carrying around debt, and that debt is costing us extra money. The interest rate we are charged for the privilege of borrowing money is called the Annual Percentage Rate, or APR. This can go as high as 29.99% when you are looking at the cost of debt on a credit card. APRs can be fixed or variable. Typically, it is fixed (meaning it doesn’t change) on a loan but is variable (meaning it can change) on something like a credit card or adjustable-rate mortgage (never a good thing to have).
Simply put, the higher the interest rate, the more it will cost you to borrow money. Also, if that debt is on a credit card, it will cost you more to carry a balance as you will be paying a higher interest rate on your unpaid balance.
2. New loans and current credit card debt will cost you more.
Again, the higher the interest rate, the more it will cost you to borrow money. Some credit products already have high-interest rates, like store-branded credit cards or products for those with poor credit ratings. But when the Fed raises interest rates, as it has done in the past, new debt will cost you more money.
What can I do about the Federal Reserve interest rate?
Nothing really. The most powerful thing you have in terms of the Federal Reserve interest rate is understanding what it is and how it affects your budget.
How does the Federal Reserve interest rate for June 2023 affect my budget?
If you are debt-free and don’t plan on borrowing money any time soon, then this has little effect on you. However, if you are carrying a credit card balance or trying to refinance a loan or take out a new loan, these higher interest rates will have you paying more to borrow money as the interest rates are higher.
What can I do to shield my budget from the Federal Reserve interest rate hikes?
1. Have an emergency fund
By shielding yourself from emergencies in the form of an emergency fund, you’ll have a buffer between you and life when the unexpected happens. If you’re not sure how to save for an emergency fund, check out this post on how to save for an emergency fund.
In that post, I recommend starting with one month of expenses saved before you move on to a debt snowball or debt avalanche method of paying your debt. Of course, you can have a fully funded emergency fund right out of the gate if you like. It’s the “personal” in personal finance.
2. Pay off debt as soon as possible
The longer the debt hangs around on something like a credit card, the more money it is costing you and the longer it will take for you to achieve other financial goals. Of course, this works the other way as well: if you have higher interest rates, then savings accounts (especially online and high-yield savings accounts, HYSAs) will offer a higher yield than before. Translation: you’ll make more money on your money.
In the debt snowball, you pay off the smallest balance first and then roll that payment into your next debt as you pay them off. With the debt avalanche method, you arrange your debt in order of the highest interest rate and pay those off first. You could also do a hybrid of the two methods. If you are concerned about interest rates rising, then I would pick the debt avalanche method.
3. Make extra money
With more income, you’ll have more money you can dedicate to your debt payoff strategy or savings goals. Check out this post on how to boost your debt payoff with side hustles. Every little bit helps.
In the end, by understanding the Federal Reserve interest rate for June 2023, you’ll be in a better position to adjust your budget and decide if debt payoff is a priority for your household right now. At the very least, you’ll put yourself in a position to be more financially independent at a faster rate.
