At its policy meeting this week, the Federal Reserve is generally anticipated to announce its eighth consecutive rate increase.
As inflation begins to decline, Fed officials are likely to approve a 0.25 percentage point hike this time around. This is a more moderate pace than the previous super-sized movements in 2022.
However, any increase in the benchmark rate will result in borrowers having to pay even more interest on their credit card debt, school loans, and other debts. On the flip side, savers could benefit from higher yields.
“The good news is that the worst is over,” said Yiming Ma, an assistant finance professor at Columbia University Business School.
The U.S. central bank is now knee-deep in a rate hike cycle that has raised its benchmark rate by 4.25 percentage points in less than a year.
Although inflation is still above the Fed’s 2% long-term target, pricing pressures have “come down substantially and the pace of rate hikes is going to slow,” Ma said.
The objective is still to effectively pump the brakes on the economy and control runaway inflation by raising borrowing costs.
What the Fed’s rate hike means for you
The interest rate at which banks lend and borrow money from one another overnight is called the federal funds rate, and it is determined by the central bank. Higher Fed rates affect consumer borrowing costs, whether directly or indirectly, and, to a lesser extent, the rates they earn on savings accounts.
Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly.
Senior economist Jacob Channel
Here’s a breakdown of how it works:
Credit cards
Since most credit cards have a variable interest rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does, too, and credit card rates follow suit. Cardholders usually see the impact within a billing cycle or two.
After rising at the steepest annual pace ever, the average credit card rate is now 19.9%, on average an all-time high. Along with the Fed’s commitment to keep raising its benchmark to combat inflation, credit card annual percentage rates will keep climbing, as well.
Households are also increasingly leaning on credit to afford basic necessities, since incomes have not kept pace with inflation. This makes it even harder for the growing number of borrowers who carry a balance from month to month.
“Credit card balances are rising at the same time credit card rates are at record highs; that’s a bad combination,” said Greg McBride, chief financial analyst at Bankrate.com.
If you currently have credit card debt, tap a lower-interest personal loan or 0% balance transfer card and refrain from putting additional purchases on credit unless you can pay the balance in full at the end of the month and even set some money aside, McBride advised.
Mortgages
Although 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone shopping for a new home has lost considerable purchasing power, partly because of inflation and the Fed’s policy moves.
“Despite what will likely be another rate hike from the Fed, mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly,” said Jacob Channel, senior economist for LendingTree.
The average rate for a 30-year, fixed-rate mortgage currently sits at 6.4%, down from mid-November, when it peaked at 7.08%.
Still, “these relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel added.
Adjustable-rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate does, as well, and these rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.
Auto loans
Even though auto loans are fixed, payments are increasing because both the price of all autos and the interest rates on new loans are increasing. So if you are planning to buy a car, you’ll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% at the beginning of 2022.
“Elevated pricing coupled with repeated interest rate increases continue to inflate monthly loan payments,” Thomas King, president of the data and analytics division at J.D. Power, said in a statement.
Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.
Student loans
Federal student loan rates are also fixed, a rate hike won’t affect so most borrowers immediately. The interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-21. Any loans disbursed after July 1 will likely be even higher.
Private student loans tend to have a variable rate tied to the Libor, prime or Treasury bill rates and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.
Until the payment pause ends, which the Education Department anticipates happening later this year, everyone with existing federal student loan debt will benefit from rates at 0%.
Savings accounts
On the upside, the interest rates on some savings accounts are higher after a run of rate hikes.
While the Fed has no direct influence on deposit rates, the rates tend to be correlated to changes in the target federal funds rate. The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid pandemic, are currently up to 0.33%, on average.
Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank, according to Bankrate.
“If you are shopping around, you are finding the best returns since the great financial crisis. If you are not shopping around, you are still earning next to nothing,” McBride said.
Still, any money earning less than the rate of inflation loses purchasing power over time, and more households have less set aside, in general.
“The best advice is pick up a side hustle to bring in some additional income, even if it’s just temporary, and pay yourself first with a direct deposit into your savings account,” McBride advised. “That’s how you are going to create the pathway to be able to save.”
