This week, the Federal Reserve is likely to hike interest rates for the sixth straight month to combat inflation, which is still at its fastest for almost 40 years.
The US Federal Reserve has already raised its benchmark short-term interest rate by 3 percentage points since March, including three outright hikes of 0.75 percentage points ahead of its upcoming monetary policy meeting.
“The impact of what has been done is not yet fully apparent,” said Chester Spatt, professor of finance at Carnegie Mellon University’s Tepper School of Business and former chief economist for the Securities and Exchange Commission. “Inflation has not come down much so far, partly because these policies take a while to kick in,” he said.
In the meantime, “the impact on consumers has created potentially difficult economic circumstances and is likely to get significantly worse as more of these rate hikes come into effect,” he added.
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The next rate hike, which is widely expected to be the fourth consecutive 0.75 percentage point hike, will coincide with a further hike in the policy rate and immediately boost funding costs for many types of consumer credit.
“The cumulative effect of rate hikes is going to really impact the economy and household budgets,” said Greg McBride, chief financial analyst at Bankrate.com.
In fact, borrowing is already significantly more expensive for consumers across the board.
What a rate hike means for you
The federal funds rate, set by the central bank, is the rate at which banks lend and borrow money from each other overnight. While that’s not the rate consumers are paying, the Fed’s moves are still impacting the interest rates consumers see every day.
From your credit card and car loan to mortgage interest, student debt and savings, here’s a breakdown of some of the key impacts of interest rate increases on you:
Although 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone buying a new home has lost significant purchasing power, in part due to inflation and Fed policy actions.
Coupled with the Fed’s vow to crack down on inflation, the average interest rate on 30-year fixed-rate mortgages is now nearly 7%, according to the latest data from the Mortgage Bankers Association.
“Interest rates continued their record-breaking rise,” said Sam Khater, Freddie Mac’s chief economist, “with the 30-year fixed-rate mortgage hitting its highest level since April 2002.”
As a result, “demand has completely fallen off the table,” McBride added. “Affordability has already been weighed down by the rise in house prices, when you add this unprecedented pace in mortgage rates the problem is compounded.”
The rise in mortgage rates since early 2022 has the same affordability impact as a 35% rise in house prices, according to McBride’s analysis. “If you got a $300,000 mortgage earlier this year, that’s less than $200,000 today.”
Adjustable rate mortgages and home equity lines of credit are linked to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts instantly. The average rate for a HELOC is already 7.3% versus 4.24% at the start of the year.
2. Credit cards
A shopper pays for her items with a credit card at a Wal-Mart Supercenter in Denver.
Matthew Staver | Bloomberg | Getty Images
Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the federal funds rate rises, so does the federal funds rate, and credit card rates follow suit.
According to Bankrate, APRs average “around 19%,” up from 16.3% at the start of the year.
Additionally, households are increasingly relying on credit cards to afford basic needs as incomes have not kept pace with inflation, McBride said, making it even harder for borrowers to make ends meet.
If the Fed announces a 75 basis point hike as expected, consumers with credit card debt will spend an additional $5.1 billion on interest this year alone, according to a new analysis by WalletHub.
3. Auto Loans
Even when car loans are fixed, the payments continue to increase as the price of all cars increases along with interest rates on new loans. So if you’re planning to buy a car, you’ll be shelling out more in the coming months.
“Auto loan rates are at their highest in 11 years,” McBride said. The average interest rate on a five-year new-car loan is currently 5.63%, up from 3.86% at the start of the year, and could top 6% with the Fed’s next move, though consumers with higher credit scores may be able to better secure loan terms.
Still, it’s not the interest rate but the vehicle’s sticker price that’s causing an affordability crisis, McBride said. “The problem is the $45,000 or $50,000 people are borrowing.”
According to Edmunds data, paying an APR of 6% instead of 5% would cost consumers $1,348 more in interest over the course of a 72-month $40,000 car loan.
4. Student Loans
Kevin Dodge | The image database | Getty Images
The interest rate on federal student loans taken for the 2022-2023 academic year has already increased to 4.99%, up from 3.73% last year and 2.75% in 2020-2021. It won’t move until next summer: Congress sets the interest rate on federal student loans each May for the upcoming academic year based on the 10-year Treasury interest rate. This new tariff will come into effect in July.
Private student loans typically have a variable interest rate tied to the Libor, Prime, or Treasury bill interest rate — and that means these borrowers will also pay more interest if the Fed hikes rates. How much more, however, will vary by benchmark.
Currently, average fixed rates for personal student loans can range from 3.22% to 14.96%, and 2.52% to 12.99% for variable rates, according to Bankrate. As with car loans, they vary widely based on creditworthiness.
Of course, anyone with existing educational debt should see where they stand with federal student loan forgiveness.
5. Savings Accounts
On the plus side, interest rates on some savings accounts are higher even after consecutive rate hikes.
While the Fed has no direct influence on deposit rates, they tend to correlate with changes in the overnight target rate and savings account rates at some of the largest retail banks, which have been near bottoming for most of the Covid pandemic, currently averaging up to 0.21%.
Thanks in part to lower overheads, high-yield online savings account rates are up to 3.5%, according to Bankrate, much higher than the average rate at a traditional bank.
As the central bank continues its rate hike cycle, these yields will continue to rise as well. “We’re going to see 4% before the start of the year,” McBride said.
Still, any money earning less than the inflation rate loses purchasing power over time.
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