This makes it easy to get a loan to buy a house or car. Consumers will pay more for all types loans and credit this year, as the Federal Reserve has raised interest rates for only the second time since 2018.
On Wednesday afternoon , Fed officials announced they will raise the benchmark short-term rate of the central bank to 0.25%. Although it may not seem like much, a quarter-point increase in the federal funds rates is likely to be the first of many increases this year by the Fed as it normalizes its monetary policy and attempts to contain the highest inflation since decades.
This is also the fourth time that the central bank has raised rates in the last four years, signaling the end of the era cheap money. The Fed is trying to curb inflation. Last month’s 40-year record of 7.9% was reached. Policymakers believe that by making it more costly to borrow money for a home, car, or other goods, they hope that consumers and businesses will be more willing to delay purchases. This will reduce the demand, which in turn will dampen price rises.
According to Dick Pfister (CEO of Alphacore Wealth Advisory), “Because rates rise, mortgages and cars are harder to afford,” he said to CBS MoneyWatch. The benefit is — if they are able to do this without causing recession — it should bring down inflationary prices.”
The Fed is focusing on economic indicators like the labor market. With the unemployment rate at an all-time low, the Fed is examining these indicators. Despite the fact that the economy is strong, there are still risks associated with Fed’s strategy shift. Higher interest rates will add another expense to household budgets.
Pfister stated, “It’s really very thin needle to thread the Federal Reserve.” “The economy has been dominated by this easy money mentality for so long, it will be difficult to get rid of that mentality.”
How much will the rate increase cost you?
A 0.25% rise in interest rates equals $25 more per year for $10,000 of debt. Consumers will be charged $150 more annually if the Fed raises rates by 1.5% in total over six increases this year, according to economists.
This can quickly add up, especially for borrowers looking to purchase large-ticket items such as houses or cars. Both of these items have seen sharp rises in their prices due to high demand and low inventory. Wall Street expects that the Fed will raise interest rates at least six more times in 2022. This would increase the policy rate to 1.5% to 1.75% according to LPL Financial strategists Lawrence Gillum, and Ryan Detrick.
Experts say this could increase the budget crunch that many consumers feel.
“Households face navigating the path between the Scylla skyrocketing inflation, and the Charybdis rising borrowing costs,” Matthew Sherwood (global economist, Economist Intelligence Unit) said in an email.
Home equity lines of credit and credit cards
Because credit card rates are based upon bank prime rates which move in tandem to the Fed, they are likely increase in line with Fed’s move. Experts predict that your credit card rate will rise over the next few billing cycles.
Other credit types with adjustable rates will also be affected, including home equity loans and adjustable-rate mortgages. These are both based on the prime interest. Although auto loans could also increase, they are more susceptible to competition from buyers and could dampen the Fed’s effect.
In anticipation of the Fed’s decision, mortgage rates have been rising. According to Freddie Mac, the average 30-year loan rate reached 3.85% in the week ending March 9. This is compared to 3.05% a full year ago.
However, mortgage rates are not always affected by Fed rate hikes. Sometimes, they move in the opposite direction. The rate of the 10-year Treasury is an important factor in long-term mortgages. Investor expectations regarding future inflation and demand for U.S. Treasurys are two examples.
CDs, savings accounts
Consumers could see a positive side effect in higher returns on savings accounts or certificates of deposit.
Even if your savings account pays more than the 0.06% average rate today, inflation is still running much higher. You’ll be still reducing the value of your money if you save it in a savings account.
Pfister stated that “if [savings account rates] go up to 1%, and inflation stays at 8%,” you still have a negative yield sense of 7%. You will still be upside-down unless inflation is controlled by rate increases.
