The Federal Reserve is again using its most potent weapon in trying to douse the: interest rate hikes. But the central bank’s move Wednesday to further raise borrowing costs means consumers and businesses are grappling with back-to-back increases of three-quarters of percentage point — a double-barrel monetary blast that could make a big impact on your finances.
To be sure, the Fed has raised rates in consecutive months before, but two 0.75 percentage-point hikes in a row “is pretty extraordinary,” noted Matt Schulz, chief credit analyst at Lending Tree. The Fed hasn’t hiked rates by a combined 1.5% percentage points in consecutive meetings since as far back as the 1980s.
Today’s hike marks the fourth rate increase this year, though inflation still hit a fresh, with prices jumping 9.1%. Yet there are signs the Fed’s actions are impacting demand, with amid a spike in mortgage rates and some consumers holding off on major purchases.
But with inflation still high and credit becoming more expensive, some economists fear the rate hikes could push the economy.
Whether the Fed succeeds in taming inflation “is the multibillion dollar question,” Schulz said. “We’re certainly hopeful that this works, but realistically the best thing for people to do is to assume that these high prices are going to be around for quite some time and to plan accordingly.”
One thing is certain:and some other types of loans will become more expensive for consumers.
Wednesday’s rate hike will increase the federal funds rate — the rate that determines borrowing between banks — to about 2.25% to 2.50%, which is higher than its pre-pandemic level of about 2%, according to Factset.
Here’s what the Fed’s pumped up interest rates could mean for your budget.
What rate hikes cost you
Every 0.25 percentage-point increase in the Fed’s benchmark interest rate translates to an extra $25 a year in interest on $10,000 in debt. So Wednesday’s 0.75 percentage-point hike means an extra $75 of interest for every $10,000 in debt.
So far, the Fed’s four hikes in 2022 have increased rates by a combined 2.25 percentage points — which means consumers are now paying an extra $225 in interest on every $10,000 in debt.
Economists expect the Federal Reserve to continue with its regime of rate hikes, but the question is whether the increases will more moderate. Currently, economists are pegging a 0.5 percentage-point increase in September, followed by two 0.25 percentage-point hikes in the last two Fed meetings of the year, according to Factset.
“They aren’t stopping anytime soon, but I don’t think we’ll remain in 5th gear for all that long,” Schulz noted.
How another big hike could impact the stock market
The stock market has taken a beating this year amid the impact of high inflation and the Fed’s series of rate hikes.
Investors are awaiting the Fed’s hints about its plans following Wednesday’s hike, with many expecting that the central bank will ease up on the size of its rate increases later this year, experts note.
The “markets [are] now pricing in a relatively swift U-turn in 2023 from aggressive tightening to loosening in order to support the economy,” noted Craig Erlam, senior market analyst at OANDA in a Wednesday research note prior to the Fed’s decision. “Attention will be on its guidance over the coming months and how hawkish it will continue to be.”
Credit cards and home equity lines of credit
Credit card debt will become more expensive, with higher APRs likely hitting borrowers in August, Schulz said.
Indeed, credit card rates have already risen in response to the Fed’s previous rate hikes, with the average rate on a new card now at 20.82%, according to LendingTree data. That’s the highest average since at least August 2019.
“Next month, rates will almost certainly top 21% for the first time since we started tracking in 2019,” Schulz said. “That’s about the highest I’ve seen in the 14 years I’ve been watching credit card rates on a regular basis.”
That means it’s more expensive for Americans to carry a credit card balance, and should prompt people to take actions to lower their costs. First, consumers with balances may want to consider a 0% balance transfer credit card, Schulz said.
“The good news is that those offers are still widely available and plentiful if you have a good credit score,” Schulz noted. That would help consumers with credit scores of about 700 and above, he noted.
Secondly, consumers can call and ask their credit card companies to lower their rates, a request that is successful about 70% of the time, he added.
Loans with adjustable rates may also see an impact, including home equity lines of credit and adjustable-rate mortgages, which are based on the prime rate.
How will another hike impact mortgage rates?
Home buyers are already paying more for mortgages due to the Fed’s rate increases this year. The average 30-year home loan stood at 5.54% as of July 21, up from 3% a year earlier, according to Freddie Mac.
Because that is addingof buying a property, home demand is slipping as some potential buyers are priced out of the market.
“[M]ortgage rates could trend up over the next few weeks,” noted Jacob Channel, senior economist for LendingTree, in an email prior to the Fed’s announcement.
He added, “Today’s high rates have dampened borrower demand for both mortgage purchases and refinances. In fact, demand for mortgages has just hit a 22-year low.”
Still, borrowers should take the long-term view, he added. “If you’re in a place right now where you can afford to buy a home without becoming excessively cost burdened, then you shouldn’t worry too much about whether or not rates could eventually come down,” Channel said. “After all, even if rates do fall over the coming years, you may still have an opportunity to refinance your current loan.”
Savings accounts, CDs
If there’s one bright spot in another Fed hike, it’s for savers: Rates for savings accounts and certificates of deposits have risen sharply this year as a result of the ongoing rate increases.
“Deposit rates will likely rise as the Fed continues to increase rates,” said Ken Tumin of DepositAccounts.com in an email prior to the announcement. “However, savings account and short-term CD rates will likely rise more than long-term CD rates until there is little, if any, rate advantage with long-term CDs.”
Already, rates for online savings accounts have jumped to 1.04% from 0.54% in May, Tumin noted.
That’s certainly better than what savers used to get, but it’s still far below the rate of inflation. With inflation over 9% in June, savers are essentially losing money by socking their cash into a savings account earning about 1%.
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