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What The Federal Reserve's Interest Rate Hike Means For You

MINNEAPOLIS (WCCO) -- You're probably noticing it everywhere from the grocery store to the used car lot. Consumer prices are climbing at the fastest rate in 40 years.

The Federal Reserve is trying to curb inflation by raising its key short-term interest rate one quarter of a percent -- impacting loans with floating rates or new loans you take out.

"Inflation is terrible," said Derek Warner of St. Louis Park. "It might affect my student loans. I mean, it doesn't feel like a lot, but long term that adds up pretty quickly."

A quarter of a percent really doesn't sound like much, but what does it actually shake out to when it comes to something like a mortgage? Here's a rough example: Let's say you have a $400,000 loan. This hikes means your monthly payment would go up about $50 -- but you pay about $20,000 extra in interest over the life of the loan.

It will also impact everything from your credit card rates to that loan you get for that new car.

"It makes borrowing more expensive," said professor Murray Frank, of the University of Minnesota's Carlson School of Management.

Frank says the idea is if borrowing is more expensive, demand drops to better match supply, slowing the economy and eventually easing inflation. But the fed is signaling there will be several more hikes this year, and that complicates things.

Federal Reserve Interest Rate Hike Explainer
(credit: CBS)

"The fed is promising the longer you wait, the higher the interest rate is going to be," Frank said. "All of this … will push people to borrow now."

While you could see a small increase in the amount of interest you earn on savings, Professor Frank thinks this could also hurt some investments.

"The rising of the interest rates could do damage to the stock market," he said.

The bottom line?

"If you want to borrow, I would argue now is the time to lock in money," said Frank.

Oh, and make sure it's a fixed rate.

"The floating rate is going to float up," he said.

The Federal Reserve expects the job market to remain strong, with the unemployment rate falling to 3.5% by the end of the year.

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