This is how the Fed’s latest rate hike will affect you
The Federal Reserve said on Wednesday that it is once again turning to its most powerful weapon to set the levelIn 40 Years: Raising Interest Rates.
The central bank raised the benchmark interest rate by 0.75 percentage points, marking the fifth hike this year and the third in a row of such magnitude. Higher rates increase borrowing costs for businesses and consumers, who will now deal with a triple dose of three-quarters of a percentage point increase — a boost that could have a huge impact on your budget.
The Fed aims to achieve a delicate equilibrium, as it seeks to curb demand for purchases and thus cool inflation while avoiding a recession. Federal Reserve Chairman Jerome PowellFailure to rein in inflation could lead to “much greater pain”. But already, Americans are paying far more than they were a year ago for everything from home loans to credit cards because of the ever-rising interest rates.
“Credit card rates are the highest since 1995, mortgage rates are the highest since 2008 and auto loan rates are the highest since 2012,” Bankrate chief financial analyst Greg McBride said in an email after the rate hike was announced. “As more rate hikes continue, this will put additional pressure on the balance sheets of households with variable debt such as credit lines and credit cards.”
As borrowing costs rise, Americans should focus on paying off their high-cost debt, such as credit cards, and boosting their emergency savings as a bulwark against an economic slowdown, McBride recommended.
What is the cost of higher prices
Each 0.25 percentage point increase in the Federal Reserve’s benchmark interest rate translates to an additional $25 per year in interest on $10,000 of debt. This means that a recent rise of 0.75 percentage points will add an additional $75 in interest for every $10,000 of debt.
But that’s on top of borrowing costs that have already jumped this year.
The Fed’s five hikes so far in 2022 have increased rates by a combined 3 percentage points, or $300 in interest added on every $10,000 of debt.
Will another big rally affect the stock market?
After last week’s disappointing inflation data,In anticipation of a significant rate hike on Wednesday. Although inflation has fallen slightly, it is not declining as quickly as economists had hoped. Even more alarming, core inflation data – which excludes volatile food and fuel prices – rose in August.
“[T]Fed rate hikes don’t work, at least [not] Until now; Brad Macmillan, chief investment officer at Commonwealth Financial Network, noted in a research note that inflation in the real economy is getting worse, not better.
Stocks fell after the announcement, with the Dow Jones Industrial Average down 0.7% in Wednesday afternoon trading. In its statement on Wednesday, the Fed said it “expects continued increases” in the target range for the federal funds rate to be “appropriate,” noting that further rate increases may be imminent.
Lines of credit for credit cards and equity
Credit card debt will become more expensive, as higher annual interest rates hit borrowers soon after interest rates are raised.
Credit card rates have already risen in response to the Fed’s previous interest rate hike, with the average annual percentage rate for a new credit card offering now at 21.59%, or more than two percentage points higher than it was at the start of 2022, according to LendingTree chief executive. credit. Analyst Matt Schulze.
“2022 has been a very tough year for people with credit card debt, unfortunately it will probably get worse before it gets 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 base rate.
What is the impact on mortgage rates?
Jacob Channel, chief economist at LendingTree, said in an email that fixed-rate home loans, such as 30- and 15-year mortgages, are likely to trend higher in the weeks following the Fed’s decision.
This is bad news for potential buyers, who are already dealing with sharply higher mortgage rates compared to last year. Earlier this month, the average 30-year home loan interest rateFor the first time since 2008.
By comparison, the average 30-year mortgage rate was about 3.1% a year ago — meaning that an increase to today’s rate of 6% would add about $520 per month in interest costs to a $300,000 loan, the channel noted.
However, mortgage rates will likely not move significantly after the Fed’s decision, he added. “Remember that while the Fed’s actions do affect mortgage rates, they do not directly determine them,” Chanel noted.
Savings accounts and CDs
If there’s one bright spot from the Fed rate hike, it’s the impact on savings accounts and certificates of deposit.
Interest rates on savings accounts should go up, but they could be slower than one might expect, noted Ken Tomin, banking expert at DepositAccounts.com. This is because many banks are “full of deposits and do not raise deposit rates significantly,” he added.
He noted that since May, online savings accounts have increased their rates from 0.54% to 1.81%. Meanwhile, one-year CD certificates jumped from 1.01% to 2.67% at the same time.
That’s an improvement over what savers used to get, but it’s still way behind the inflation rate. With an inflation rate of 8.3% in August, savers are essentially losing money by putting their money into a savings account that earns around 2%. However, it is better than the stock market, which is down about 20% this year.
What effect does this have on student loans?
Borrowers taking out new private student loans should prepare to pay more as rates increase. The current interest range for federal loans is between about 5% and 7.5%.
However, payments on interest-free federal student loans have been suspended until December 31 as part of an emergency measure put in place early in the pandemic. As President Joe Biden announced,Up to $10,000 for most borrowers and up to $20,000 for Bill Grant recipients.
How do higher rates affect cryptocurrencies?
Cryptocurrencies such as Bitcoin have fallen in value since the Federal Reserve started raising interest rates; As well as many previously high-value technology stocks. Bitcoin has fallen from a peak of around $68,000 to below $20,000.
Higher rates mean that safe assets such as Treasury bonds are becoming more attractive to investors due to their higher yields. This, in turn, makes riskier assets such as technology stocks and cryptocurrencies less attractive.
However, bitcoin still has problems separate from economic policy. Two major cryptocurrency companiesThis has shaken the confidence of investors in the cryptocurrency field.
Could a price hike cause a recession?
The question is whether Wednesday’s rate hike can help cool inflation without pushing the US economy into recession.
Some economists believe a recession is a possibility, given that raising prices will slow spending from consumers and businesses. At the same time, inflation is causing some Americans to tighten their budgets, which could also weaken the economy given that 70 cents of every $1 in GDP is tied to consumer spending.
“We expect consumer spending to continue to slow and deflate” due to inflation, noted Eric Lunde, principal economist at The Conference Board, a trade organisation. “We expect a short and moderate recession” in the fourth and first quarters.
However, other economists say thatThat the Fed could stage a “soft landing,” in which the economy weakens enough to slow inflation, employment and wage growth without slipping into a recession.
Can price hikes be reversed?
Stock prices rose in August on hopes the Fed would reverse course, but it seems increasingly unlikely that interest rates will drop anytime soon.
Economists expect Federal Reserve officials to expect the key rate to reach 4% by the end of this year. It is also likely to indicate additional increases in 2023, up to 4.5%.
– With Associated Press reports.