Hike rates

The Fed is about to raise rates again. Here’s what that means for your money.

On Wednesday, the Federal Reserve will once again turn to its most powerful tool in an attempt to tame the hottest inflation in four decades: rising interest rates.

The central bank is expected to raise rates another 0.75%, which would mark its third straight increase of this magnitude and its fifth overall rate hike this year. But with inflation stay stubbornly highsome economists say the Fed could take an even more drastic step by raising rates by a full percentage point.

Whatever happens, there is one certainty: it is about to get even more expensive for consumers and businesses to borrow money. Already, Americans are paying far more than they were a year earlier for everything from home loans to credit cards due to rate hikes. Another big rate hike will put consumers in a tough spot, as inflation remains high and borrowing costs are about to get even more expensive.

“The Fed has sent a message of ‘tough love’ that interest rates will be higher and for longer than expected,” Bankrate chief financial analyst Greg McBride said in an email before the announcement. “Rates are rising at rates not seen in decades and at levels not seen in years.”

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. That means a 0.75 percentage point hike on Wednesday would earn $75 more in interest for every $10,000 in debt.

But that comes on top of borrowing costs that have already jumped this year.

The four Fed hikes so far in 2022 have raised rates by a combined 2.25 percentage points, meaning consumers are now paying an additional $225 in interest on every $10,000 of debt. Another 0.75% increase on Wednesday would take that increase to 3 percentage points, or $300 in interest on every $10,000 of debt.

Potential Fed interest rate hike fuels fears of economic slowdown


Will another big rally impact the stock market?

After discouraging inflation data last week, the market faded 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.

That being said, it’s likely that on Wednesday investors will get an update on what Fed Chairman Jerome Powell is signaling on the path of future rate hikes.

“Expectations are very hawkish, and the Fed can exit as expected and be even more dovish than expected,” McMillan said. “It probably limits the market downside following this meeting and could simply provide benefits in the future.”

Credit cards and home equity lines of credit

Credit card debt will become more expensive, with higher APRs likely to hit borrowers soon after rates rise.

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.

MoneyWatch: US Mortgage Rates Above 6% For First Time Since 2008 As Applications Fall


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 loan reached 6% for 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 about 2%. It’s still better than the stock market, which this year is down nearly 20%.

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 is still possible that the Fed could engineer a “soft landing,” where the economy weakens enough to slow inflation, hiring, and wage growth without falling into recession.