How the Fed’s Interest Rate Hikes Could Affect Your Bank Account
WASHINGTON — The Federal Reserve’s move Wednesday to raise its key rate by a half-point brought it to a range of 4.25% to 4.5%, the highest level in 14 years.
The Fed’s latest increase — its seventh rate hike this year — will make it even costlier for consumers and businesses to borrow for homes, autos and other purchases. If, on the other hand, you have money to save, you’ll earn a bit more interest on it.
Wednesday’s rate hike, part of the Fed’s drive to curb high inflation, was smaller than its previous four straight three-quarter-point increases. The downshift reflects, in part, the easing of inflation and the cooling of the economy.
As interest rates increase, many economists say they fear that a recession remains inevitable — and with it, job losses that could cause hardship for households already badly hurt by inflation.
Here’s what to know:
WHAT’S PROMPTING THE RATE INCREASES?
The short answer: Inflation. Over the past year, consumer inflation in the United States has clocked in at 7.1% — the fifth straight monthly drop but still a painfully high level.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.
Fed Chair Jerome Powell has acknowledged that aggressively raising interest rates would bring “some pain” for households but that doing so is necessary to crush high inflation.
WHICH CONSUMERS ARE MOST AFFECTED?
Anyone borrowing money to make a large purchase, such as a home, car or large appliance, will take a hit, according to Scott Hoyt, an analyst with Moody’s Analytics.
“The new rate pretty dramatically increases your monthly payments and your cost,” he said. “It also affects consumers who have a lot of credit card debt — that will hit right away.”
That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, though they have risen lately. So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately.
“I’m not sure interest rates are top of mind for most consumers right now,” Hoyt said. “They seem more worried about groceries and what’s going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around.”
HOW WILL THIS AFFECT CREDIT CARD RATES?
Even before the Fed’s latest move, credit card borrowing rates had reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.
And with prices still surging, there are signs that Americans are increasingly relying on credit cards to help maintain their spending. Total credit card balances have topped $900 billion, according to the Fed, a record high, though that amount isn’t adjusted for inflation.
John Leer, chief economist at Morning Consult, a survey research firm, said its polling suggests that more Americans are spending down the savings they accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.
Those who don’t qualify for low-rate credit cards because of weak credit scores are already paying significantly higher interest on their balances, and they’ll continue to.
As rates have risen, zero percent loans marketed as “Buy Now, Pay Later” have also become popular with consumers. But longer-term loans of more than four payments that these companies offer are subject to the same increased borrowing rates as credit cards.
For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which follows the Fed’s.
HOW ARE SAVERS AFFECTED?
The rising returns on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, which means that households may want to boost savings if possible. You can also now earn more on bonds and other fixed-income investments.
Though savings, CDs, and money market accounts don’t typically track the Fed’s changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly high deposits.)
WILL THIS AFFECT HOME OWNERSHIP?
Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage dipped to 6.33%. That means the rate on a typical home loan is still about twice as expensive as it was a year ago.
Mortgage rates don’t always move in tandem with the Fed’s benchmark rate. They instead tend to track the yield on the 10-year Treasury note.
Sales of existing homes have declined for nine straight months as borrowing costs have become too high a hurdle for many Americans who are already paying much more for food, gas and other necessities.
WHAT IF I WANT TO BUY A CAR?
Since the Fed began increasing rates in March, the average new vehicle loan has jumped more than 2 percentage points, from 4.5% to 6.6% in November, according to the Edmunds.com auto site. Used vehicle loans are up 2.1 percentage points to 10.2%. Loan durations for new vehicles average just under 70 months, and they’ve passed 70 months for used vehicles.
Most important, though, is the monthly payment, on which most people base their auto purchases. Edmunds says that since March, it’s up by an average of $61 to $718 for new vehicles. The average payment for used vehicles is up $22 per month to $565.
Ivan Drury, Edmunds’ director of insights, says financing the average new vehicle with a price of $47,000 now costs $8,436 in interest. That’s enough to chase many out of the auto market.
“I think we’re actually starting to see that these interest rates, they’re doing what the Fed wants,” Drury said. “They’re taking away the buying power so that you can’t buy a vehicle anymore. There’s going to be fewer people that can afford it.”