What the Fed’s latest interest rate hike means for your money

The Federal Reserve is once again using its most powerful weapon in an attempt to stifle the highest inflation in 40 years: increases in interest rates. But the central bank’s decision on Wednesday to raise borrowing costs further means consumers and businesses are grappling with back-to-back increases of three-quarters of a percentage point – a double-barrel monetary explosion that could have an impact important to your finances.

Granted, the Fed has raised rates in previous months, but two consecutive 0.75 percentage point hikes “is pretty extraordinary,” noted Matt Schulz, chief credit analyst at Lending Tree. The Fed hasn’t hiked rates by a combined 1.5% in back-to-back meetings for this long like the 1980s.

Today’s hike marks the fourth rate hike this year, although inflation has yet to hit a new high record in june, with prices jumping 9.1%. Still, there are signs that the Fed’s actions are having an impact on demand, with decline in home sales amid soaring mortgage rates and some consumers delaying major purchases.

But with inflation still high and credit increasingly expensive, some economists fear rate hikes will push the economy in a recession.

Whether the Fed will be successful in controlling inflation “is the multi-billion dollar question,” Schulz said. “We certainly hope it works out, but realistically the best thing people can do is to assume these high prices are going to last for a while and plan accordingly.”

One thing is certain: Credit card debt and some other types of loans will become more expensive for consumers.

Wednesday’s rate hike will raise the federal funds rate – the rate that determines interbank borrowing – to around 2.25% to 2.50%, which is above its pre-pandemic level of around 2%. %, according to Factset.

Here’s what the Fed’s interest rate hike could mean for your budget.

Are gas credit cards worth it?


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. So Wednesday’s 0.75 percentage point hike means an additional $75 in interest for every $10,000 in debt.

So far, the Fed’s four hikes 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.

Economists expect the Federal Reserve to continue its rate hike regimen, but the question is whether the hikes will be more subdued. Currently, economists are looking for a 0.5 percentage point increase in September, followed by two 0.25 percentage point hikes at the last two Fed meetings of the year, according to Factset.

“They won’t stop anytime soon, but I don’t think we’ll stay in 5th gear for that long,” Schulz noted.

How Another Big Rise Could Impact the Stock Market

The stock market has been battered this year due to the impact of high inflation and the Fed’s series of rate hikes.

Investors await clues from the Fed on its plans after Wednesday’s hike, with many expecting the central bank to ease the scale of its rate hikes later this year, experts note.

The steps [are] now pricing a relatively quick turnaround in 2023 from aggressive tightening to easing to support the economy,” OANDA senior market analyst Craig Erlam noted in a Wednesday research note ahead of the Fed’s decision. . “The focus will be on his advice over the next few months and how hawkish they will continue to be.”

Credit cards and home equity lines of credit

Credit card debt will become more expensive, with higher APRs likely to hit borrowers in August, Schulz said.

Indeed, credit card rates have already risen in response to previous Fed rate hikes, with the average rate on a new card now at 20.82%, according to data from LendingTree. This is the highest average since at least August 2019.

“Next month, rates will almost certainly hit 21% for the first time since we started tracking in 2019,” Schulz said. “That’s about the highest I’ve seen in 14 years of regularly monitoring credit card rates.”

That means it’s more expensive for Americans to keep a credit card balance and should prompt people to take steps to cut costs. First, consumers with balances can consider a 0% balance transfer credit card, Schulz said.

“The good news is that these offers are still widely available and plentiful if you have good credit,” Schulz noted. This would help consumers with credit scores around 700 and above, he noted.

Second, 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.

Adjustable rate loans can also have an impact, including home equity lines of credit and adjustable rate mortgages, which are based on the prime rate.

How will another hike affect mortgage rates?

Homebuyers are already paying more for mortgages due to Fed rate hikes 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 it adds up thousands of dollars in annual cost to buy a property, the demand for housing decreases because some potential buyers are excluded from the market.

“[M]mortgage rates could rise over the next few weeks,” Jacob Channel, senior economist for LendingTree, noted in an email ahead of the Fed’s announcement.

He added: “Today’s high rates have dampened borrower demand for mortgage purchases and refinances. In fact, mortgage demand just hit a 22-year low.”

Still, borrowers should take a long-term view, he added. “If you’re currently in a place where you can afford to buy a home without being overly burdened with costs, you shouldn’t worry too much about whether rates might eventually drop,” Channel said. “After all, even if rates go down over the next few years, you may still have the option of refinancing your current loan.”

Savings accounts, CDs

If there’s a silver lining in another Fed hike, it’s for savers: Savings account and certificate of deposit rates have risen sharply this year due to ongoing rate hikes.

“Deposit rates will likely rise as the Fed continues to raise rates,” Ken Tumin of DepositAccounts.com said in an email ahead of the announcement. “However, savings account and short-term CD rates will likely rise more than long-term CD rates until there is little or no rate advantage with long-term CDs. .”

Already, rates for online savings accounts have jumped to 1.04% from 0.54% in May, Tumin noted.

It’s certainly better than what savers were used to getting, but it’s still well below the rate of inflation. With inflation above 9% in June, savers are essentially losing money by putting their money in a savings account which is earning around 1%.

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