Fed Raised Rates: Here Is What It Means For Women’s Finances
The Federal Reserve raised interest rates for the first time in more than three years on Sept. 16, by a quarter percentage point to a range of 3.75% to 4%, a move that could make borrowing more expensive as a strategy to control rising prices, using one of the macroeconomic tools it has at its disposal. However, the impact is not the same for every household. Women, particularly women of color and mothers managing tight household budgets, may be more affected depending on income, debt, homeownership, savings and the financial flexibility they already have. In this article, we will walk through what an increase in rates means, how higher rates affect women of color and what to do to borrow less.
The Fed Raised Rates For The First Time Since 2023—What Does It Mean?
The federal funds rate is the interest rate banks charge one another for overnight lending. Although consumers do not borrow directly at that rate, changes in the federal funds rate can influence what banks charge for credit cards, personal loans, auto loans and other forms of credit, adding pressure for Americans already feeling the effects of higher prices. The Federal Reserve’s 2024 Survey of Household Economics and Decision making found that 60% of adults said price changes during the previous year had made their financial situation worse. Seventy-nine percent adjusted their behavior because of higher prices, including switching to less expensive products, consuming less or delaying major purchases.
In practical terms, higher rates can make some everyday financial decisions more expensive. For instance, carrying a credit-card balance can cost more over time, financing a car or another large purchase can mean higher monthly payments, and taking out a new loan may require more careful budgeting. On the other hand, households with money set aside may be able to earn more interest by keeping savings in higher-yield accounts.
How Higher Rates Affect The Financial Lives Of Women Of Color
Higher interest rates do not automatically affect all women more than men. However, research does show that the effects of monetary policy can vary significantly by race, gender, housing status and debt. For instance, aFederal Reserve Bank of San Francisco analysis found that women-headed households were more likely to rent and less likely to have mortgages than households headed by men. Among the groups examined, 57% of Black women-headed households were renters, compared with 45% of Black men-headed households.
The study did not conclude that Black women are universally harmed more by interest-rate increases. Instead, it showed that different households experience monetary policy through different financial channels and that higher rates interact with existing disparities. For instance, a homeowner with substantial savings and a fixed-rate mortgage may experience a rate increase differently from a renter who needs a car loan or a parent who relies on a credit card when monthly expenses exceed income.
For women of color, the pressure can be compounded by having less financial room to absorb higher borrowing costs. The San Francisco Fed found that Black women who head households are more likely to be single and support their families on their own, while women-headed households generally have lower per-capita family incomes than those headed by men. That can leave fewer resources to fall back on when interest costs rise or an unexpected expense occurs; Federal Reserve research found that single Black mothers had about $4,154 in median wealth in 2019, compared with $46,024 for single white mothers. With a smaller financial cushion, higher borrowing costs can make it harder to manage an emergency, finance a necessary purchase or avoid carrying expensive debt.
How To Borrow Less And Make Higher Interest Rates Work For You
When borrowing gets more expensive, this can be a time to focus on the financial resources already available to the household before taking on additional debt. Here are some steps you can take today:
Start with recurring expenses
Review subscriptions, memberships and automatic charges, and cancel those you no longer use or that no longer provide enough value. Recurring expenses are often linked to a credit card, so by cleaning, you are making sure no extra money is paid for something you are not using.
Reconsider how bills are paid
Using a credit card for recurring expenses can make sense when the money to pay those expenses is already available in a checking account, and the statement balance can be paid in full each month. In that case, a household may be able to take advantage of rewards or points without paying interest.
However, if the credit card is being used because there is not enough money available to cover the expense, then it is time to consider the budget and cut as much as possible.
One simple rule is to put on a credit card only expenses you could have paid with a debit card that day, then pay the statement balance in full. One example: consider a grocery bill or utility payment you want to place on a credit card; ask yourself if the balance can be paid in full by the end of the cycle, if it does not become debt, then is a good option to put it in your credit card. Those days between the purchase and the end of the cycle can help you manage your finances, but you should be able to keep it within that period.
In times of higher rates, it is best to create a necessity plan before borrowing for a larger purchase. Ask whether the purchase is essential now, whether a less expensive alternative exists and whether it can be postponed long enough to save for some or all of the cost. The Federal Reserve found that 46% of adults delayed a major purchase in response to higher prices in 2024. When the purchase is optional, saving first can reduce the amount that eventually needs to be financed.
Higher rates also create an opportunity on the savings side
An emergency fund should remain accessible, but that does not mean it has to earn little or no interest. Households can compare insured high-yield savings accounts and other liquid savings options to determine whether their emergency cash could earn a better return while remaining available when needed.
That is where a high-rate environment can work in a saver’s favor: instead of paying a bank more interest to use its money, households with savings can position themselves to earn more interest by letting a bank hold their money.
Bottom line, for households feeling overwhelmed, that may begin with one canceled subscription, one credit-card balance paid in full or a small amount automatically transferred into savings each payday. The goal is to gradually rely less on expensive borrowing while making the money already available work harder.
This article was originally published on Forbes.com