What Federal Reserve rate hikes mean for Lubbock borrowers

Published: Feb. 4, 2022 at 6:40 PM CST
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LUBBOCK, Texas (KCBD) - The price to borrow money is going up, as the Federal Reserve plans a series of rate hikes this year.

It’s a response to rising inflation. The country has seen a historic rise in inflation over the past year.

The Consumer Price Index grew by six percent in the second half of 2021. That’s five times higher than 2020.

Now, the Federal Reserve is taking a more aggressive approach to try and bring the economy back into alignment.

“It’s almost like a forest fire,” Arnold said. “You want a controlled burn, but you don’t want it to get out of control. The Fed is trying to get some parameters around that inflation and get it under control.”

Those parameters come in the form of interest rate hikes, possibly as soon as next month.

That will be just one of what’s likely to be multiple hikes to the prime rate, each about a quarter of a percent.

“All of this is in response to raising inflation,” Arnold said.

That inflation caused by what have been historically low interest rates since March 2020, coupled with stimulus checks, PPP loans and other steps taken to stimulate the pandemic economy.

“Consumer goods, energy costs are going up, housing costs have gone up, electricity costs,” Arnold said. “Anything we can look at and measure. We don’t see anything going down.”

There are only a few ways to take that money back out of the system. One of them is by bringing those interest rates back up.

“They’re playing catch up,” Arnold said.

Forcing a decrease in demand to allow the money supply to stabilize. It should bring consumer prices down, but lower prices now are only a byproduct of paying more over time. It’s a price borrowers will have to pay to restore economic balance.

“There’s always a balancing act that the Fed has,” Arnold said. “How fast can we raise interest rates, but not raise them fast enough to shut off the economy. So there may be some temporary pain in terms of paying more to borrow money, but overall for the economy, it’s not necessarily a bad thing.”

That means any loan coming from a bank will cost you more in the long run. That includes car loans, student loans or the mortgage on your home. Those rates will all be on the rise

“Now is a good time to borrow money,” Arnold said. “If you’ve got a job and the ability to repay, it’s gonna be cheaper to borrow money in February of ‘22 that it is gonna be in May of ‘22 or July of ‘22.”

While consumers will pay a higher rate for almost any loan they receive, there is also an opportunity to make money on certain types of accounts.

Deposit rates on saving accounts that compound interest will also go up.

Those rates will lag behind the prime rate, but Arnold says they should start to climb by the end of the year.

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