The Federal Reserve said Wednesday it was once again turning to its most potent weapon to curb thein 40 years: Increase in interest rates.
The central bank raised its benchmark interest rate by 0.75 percentage points, marking the fifth hike this year and the third consecutive increase of this magnitude. Higher rates are raising borrowing costs for businesses and consumers, who will now face a triple dose of three-quarter percentage point hikes – a boost that could have a big impact on your budget.
The Fed is aiming for a delicate balance, seeking to compress purchasing demand and thus calm inflation while avoiding a recession. Federal Reserve Chairman Jerome Powellthat failure to control inflation could lead to “much greater pain”. But already, Americans are paying far more than they were a year earlier for everything from home loans to credit cards due to ongoing rate hikes.
“Credit card rates are the highest since 1995, mortgage rates are the highest since 2008 and auto loan rates are the highest since 2012,” said Bankrate chief financial analyst Greg McBride. , in an email after the rate hike announcement. “With more rate hikes to come, this will put additional pressure on the budgets of households with variable rate debt, such as home equity lines of credit and credit cards.”
Given higher borrowing costs, Americans should focus on paying off expensive debt, such as credit cards, and increase their emergency savings as a buffer against an economic downturn, McBride recommended.
How much are rate hikes costing you?
Every 0.25 percentage point increase in the Fed’s benchmark interest rate translates to an additional $25 a year in interest on $10,000 of debt. This means that the latest 0.75 percentage point hike will add an additional $75 in interest for every $10,000 in debt.
But that comes on top of borrowing costs that have already jumped this year.
The five Fed hikes so far in 2022 have raised rates by a combined 3 percentage points, or $300 in interest added on every $10,000 of debt.
Will another big rally impact the stock market?
After discouraging inflation data last week,in anticipation of a sharp rate hike on Wednesday. Although inflation is slowing slightly, it is not receding as quickly as economists had hoped. Even more alarmingly, core inflation data – which excludes volatile food and fuel prices – rose in August.
“[T]Fed rate hikes don’t work, at least [not] Again; and that inflation in the real economy is getting worse, not better,” Brad McMillan, chief investment officer of the Commonwealth Financial Network, noted in a research note. “Higher rates mean lower stock market values.
Shares fell after the announcement, with the Dow Jones Industrial Average losing 0.7% on Wednesday afternoon. In his Wednesday statementthe Federal Reserve said it “expects continued increases” to the target range for the federal funds rate “will be appropriate,” signaling that more rate increases may be ahead.
Credit cards and home equity lines of credit
Credit card debt will become more expensive, with higher APRs hitting borrowers soon after the rate hike.
Credit card rates have already risen in response to previous Fed rate hikes, with the average APR on a new credit card offer now at 21.59%, more than 2 percentage points higher than early in 2022, according to LendingTree chief credit officer analyst Matt Schulz.
“2022 has been a pretty brutal year for people in credit card debt, and sadly things are likely to get worse before they get better,” he said in an email.
Adjustable rate loans may also see an increase, including home equity lines of credit and adjustable rate mortgages, which are based on the prime rate.
What is the impact on mortgage rates?
Fixed-rate home loans, such as 30- and 15-year mortgages, likely trend higher in the weeks following the Fed’s decision, Jacob Channel, senior economist for LendingTree, said in an email.
This is bad news for potential buyers, who are already facing significantly higher mortgage rates than a year ago. Earlier this month, the average interest rate on a 30-year home loanfor the first time since 2008.
By comparison, the average rate for a 30-year mortgage was about 3.1% a year ago, which means that increasing the current rate by 6% adds about $520 per month in mortgage costs. interest on a $300,000 loan, Channel noted.
However, mortgage rates may not move significantly after the Fed’s decision, he added. “Remember that while the Fed’s actions impact mortgage rates, they don’t set them directly,” Channel noted.
Savings accounts, CDs
If there’s one silver lining from the Fed’s rate hike, it’s the impact on savings accounts and certificates of deposit.
Interest rates on savings accounts are expected to rise, but it could be slower than expected, noted Ken Tumin, banking expert at DepositAccounts.com. Indeed, many banks are “overflowing with deposits and not aggressively raising deposit rates”, he added.
Since May, online savings accounts have increased rates by 0.54% to 1.81%, he noted. Meanwhile, one-year online CDs jumped 1.01% to 2.67% over the same time.
That’s an improvement over what savers used to get, but it still lags the rate of inflation. With inflation at 8.3% in August, savers are essentially losing money by putting their money in a savings account which is earning around 2%. It’s still better than the stock market, which this year is down nearly 20%.
What is the impact on student loans?
Borrowers taking out new private student loans should be prepared to pay more as rates rise. The current interest range for federal loans is between about 5% and 7.5%.
That said, payments on federal student loans are suspended without interest until Dec. 31 as part of an emergency measure put in place at the start of the pandemic. President Joe Biden also announcedup to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients.
How Do Higher Rates Impact Crypto?
Cryptocurrencies like bitcoin have lost value since the Fed started raising rates; the same is true for many previously popular tech stocks. Bitcoin plunged from a high of around $68,000 to below $20,000.
Higher rates mean that safe assets like Treasuries have become more attractive to investors as their yields have risen. This makes risky assets like tech stocks and cryptocurrencies less attractive, in turn.
Yet bitcoin continues to suffer from issues separate from economic policy. Two Big Crypto Companiesshaking the confidence of crypto investors.
Could rising interest rates cause a recession?
The question is whether Wednesday’s rate hike can help temper inflation without plunging the US economy into a recession.
Some economists think a recession is likely, as rate hikes will slow consumer and business spending. At the same time, inflation is forcing some Americans to tighten their budgets, which could also weaken the economy given that 70 cents of every dollar of GDP is tied up in consumer spending.
“We expect consumer spending to continue to slow and contract” due to inflation, noted Erik Lundh, senior economist at The Conference Board, a trade organization. “We expect a brief, mild recession” in the fourth and first quarters.
Even so, other economists say it isthat the Fed could engineer a “soft landing,” where the economy weakens enough to slow inflation, hiring, and wage growth without falling into recession.
Could the rate hikes be reversed?
Stock prices rose in August on hopes the Fed would reverse course, but it looks increasingly unlikely that rates will fall anytime soon.
Economists expect Fed officials to expect the key rate to hit 4% by the end of this year. They are also likely to report further increases in 2023, even up to 4.5%.
—With Associated Press reporting.