If you’ve heard any financial or economic news in the past year or so, you’ve probably heard experts talking about Federal Reserve interest rates and how they’re going to change. After many years of remaining relatively low, interest rates have increased considerably.

But will these rates keep rising from here? And if so, what does it mean for you?

What Are Federal Reserve Interest Rates?

In case you aren’t familiar, the Federal Reserve is an institution responsible for dictating United States monetary policy. It controls many aspects of our economic system, exerting careful control to prevent the most catastrophic consequences of economic threats like recessions, inflation, and even unemployment.

One of the most important responsibilities of the Federal Reserve is setting the Federal Funds rate, the interest rate at which commercial banks can lend and borrow money. The Federal Reserve also sets other interest rates, practices quantitative easing and tightening, and has a host of other economic responsibilities.

Why Do Federal Reserve Interest Rates Matter?

Why do the interest rates set by the Federal Reserve matter so much?

Investors, and especially real estate investors, watch interest rate fluctuations very closely because they have a direct impact on how they invest. When a commercial bank borrows money, it can then lend that borrowed money to end consumers. The interest rate at which the commercial bank borrows directly impacts the interest rate at which the consumer borrows. For example, if the commercial bank borrows money at a 2 percent interest rate, it may loan the money to an end consumer at a rate of 4 percent so they can remain profitable. If the commercial bank is forced to borrow at a 6 percent interest rate, it can’t loan the money to a consumer at the 4 percent interest rate or it will lose money; it must increase consumer interest rates to around 8 percent to maintain profitability.

In other words, if you’re shopping for a house, a rising Federal Funds rate typically means your mortgage interest rate will rise as well. Lower interest rates are typically favorable for real estate investors, enabling them to borrow more money while paying less interest, taking advantage of financial leverage in the process.

Of course, interest rates matter to more than just investors. Higher interest rates mean that borrowing money is less favorable, so fewer commercial banks and entrepreneurs are willing to borrow money to build or expand businesses. Fewer new and expanding businesses translates to fewer job opportunities, higher unemployment, and less overall economic activity.

On top of that, higher interest rates can spook investors, resulting in declining stock market prices and lower prices for other investment classes.

So why do we tolerate high interest rates if they have so many negative effects? Put simply, it’s because lower interest rates can be even more destructive. When interest rates are too low, and money flows too freely, inflation spikes, economic inequality grows, and money is more available to irresponsible spenders.

The Latest Fed Interest Rate Developments

Currently, Federal Reserve interest rates are the highest they’ve been since 2007. But the Fed is planning to increase interest rates even further in the near future. After hovering near zero for most of the past 15 years, the Federal Funds rate is now 4.57 percent – and officials are expected to maintain consistent, small incremental increases until they hit an interest rate of 5 to 5.25 percent.

More aggressive forecasting targets an interest rate of 5.75 percent. It’s also possible that the Fed will slow down their rate hikes, settling for an interest rate below 5 percent. We can never be sure exactly how this all-important rate will fluctuate, but it appears as though the policymakers at the Federal Reserve are interested in pushing interest rates even higher over the next year or two, at minimum.

Key Tips for Consumers

If you’re trying to make sense of all this as a consumer, these are some of your most important tips for success:

  •       Monitor the latest developments. Always keep an eye on the news so you can remain informed about the latest Federal Reserve developments. Forecasts change regularly, so it’s possible this institution could reverse course.
  •       Time your loan decisions carefully. If you’re planning on taking out a major loan in the near future, consider your options carefully – and try to time your decision to take advantage of the lowest interest rate possible. The bigger your loan is, and the longer the terms of your loan are, the more important this consideration is.
  •       Rebalance your portfolio. As an active investor, it’s important to rebalance your portfolio on a regular basis. Knowing that the Federal Reserve is going to increase interest rates should influence your rebalancing decisions. With higher interest rates, mortgages and loans will be less affordable, the stock market will (typically) decline in value, and inflation will be abated. Consider reallocating your resources into investments that will perform well during periods with high interest rates.

It does appear that Fed interest rates are going to continue increasing, at least for the time being. This is arguably good, since it combats inflation without allowing us to drift into recession territory. But as always, you’re responsible for managing your own personal finances and making changes to your investment approach based on the economic landscape around you.