How raising interest rates at the Federal Reserve affects your finances

Washington (AFP) – High mortgage rates have slashed home sales. Credit card rates are becoming more of a burden, as are car loans. Savers are finally receiving truly visible returns, while crypto assets are reeling.

Wednesday’s move by the Federal Reserve to further tighten credit raised the benchmark interest rate by a large 0.75 percentage point for the second time in a row. The Fed’s latest increase, its fourth since March, will inflate borrowing costs for homes, cars and credit cards, although many borrowers may not feel the impact immediately.

The central bank is aggressively raising borrowing costs in an effort to slow spending, cool the economy and defeat the worst of the inflation spread in Jilin.

The Fed’s actions, for now, ended the ultra-low rate era that emerged from the 2008-2009 Great Recession to help rescue the economy – and then re-emerged during a brutal pandemic recession, when the Fed cut its benchmark interest rate again. to nearly zero.

President Jerome Powell hopes to make borrowing more expensiveThe Federal Reserve will succeed in slowing the demand for homes, cars, and other goods and services. Spending cuts could then help bring in inflation, which was recently measured at a four-decade high of 9.1%.Back to the Fed’s 2% target.

However, the risks are high. A series of high rates could push the US economy into recession. This means higher unemployment, more layoffs, and more downward pressure on stock prices.

How will all this affect your money? Here are some of the most frequently asked questions about the impact of a price hike:

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I am thinking of buying a house. What’s going on with mortgage rates?

High interest rates torpedoed the housing market. Home loan rates have nearly doubled from a year ago to 5.5%, although they have held steady in recent weeks even as the Fed has signaled the possibility of further credit tightening.

That’s because mortgage rates don’t necessarily move in tandem with Fed increases. Sometimes, they move in the opposite direction. Long-term mortgages tend to track the yield on 10-year Treasuries, which in turn is influenced by a variety of factors. These factors include investor expectations for future inflation and global demand for US Treasuries.

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Investors expect a recession to hit the US economy later this year or early next. This would eventually force the Fed to cut the benchmark interest rate in response. Expectations that the Federal Reserve will have to reverse some of its gains next year helped cut the 10-year yield, from 3.5% in mid-June to roughly 2.8%.

Would it be easier to find a home?

Existing Home Sales New home sales have fallen for five consecutive months fell in June. If you are financially able to go ahead with buying a home, you will likely have more options than you did a few months ago.

Choices are few in many cities. But the number of available homes nationwide has begun to rise after falling to rock bottom levels at the end of last year. There are now 1.26 million homes for sale, according to the National Association of Realtors, up 2.4% from a year ago.

I need a new car. Should I buy one now?

Usually, Fed rate hikes make auto loans more expensive. But other factors also affect these rates, including competition between automakers, which can sometimes lower borrowing costs.

Wednesday’s rate hike likely won’t affect new car sales much because those buyers are mainly wealthy customers who won’t be affected by a relatively small increase in monthly payments, Jonathan Smoke, chief economist at Cox Automotive, said. In contrast, he said, used car buyers with weaker credit and those paying higher loan rates may be hurt.

“Many used car buyers are already feeling the effects of higher energy, food and rental prices,” said Smock.

He pointed out that the prices of used cars began to decline, and the availability of vehicles began to return to normal levels.

According to Bankrate.com, the full amount of the Fed rate hike doesn’t always transfer to auto loans. New 60-month loans for new cars are up about a percentage point this year to an average of 4.86%, Bankrate.com says, while the price for a used 48-month car is up less than 1 point to 5.38%.

What will happen to my credit card?

For users of credit cards, equity lines of credit and other floating-rate debt, rates will rise roughly the same amount the Fed raised, usually within one or two billing cycles. That’s because those rates are based in part on the banks’ base rate, which moves in tandem with the Federal Reserve.

Those who don’t qualify for lower rate credit cards may be stuck paying higher interest on their balances. The rates on their card will go up as the base price goes up.

The Fed’s rate increases have already led to credit card borrowing rates above 20% for the first time in at least four years, according to LendingTree, which has tracked data since 2018.

How will this affect my savings?

You can now earn more on bonds, CDs, and other fixed income investments. And it depends on where your savings left off, if you have any.

Savings accounts, certificates of deposit, and money market accounts don’t usually track Fed changes. Instead, banks tend to take advantage of a higher rate environment to try and increase their profits. They do this by charging borrowers higher rates, without necessarily offering any better rates to savers.

But online and other banks with high-yield savings accounts are often an exception. These accounts are notorious for being very competitive for depositors. The only catch is that they usually require large deposits.

HOW ARE ELECTION RATES AFFECTED ON CRYPTO?

Like many high-value technology stocks, cryptocurrencies such as bitcoin have fallen in value since the Federal Reserve started raising interest rates. Bitcoin has fallen from its peak around $68,000 to $21,000.

Higher rates mean that safe assets such as bonds and treasuries are becoming more attractive to investors because their returns are now higher. This, in turn, makes riskier assets such as technology stocks and cryptocurrencies less attractive.

That said, bitcoin has its own problems separate from economic policy. Two major crypto companies have failed. The fact that the safest place you can store money right now – bonds – doesn’t seem like a safer move, doesn’t help the shaky confidence of cryptocurrency investors.

Will the student loan payment go up?

Currently, federal student loan payments have been suspended through August 4. 31 as part of an emergency measure put in place early in the pandemic. Inflation means that loan holders have less income to make payments. However, a slowing economy that reduces inflation can bring some relief through the fall.

Depending on the state of the economy, the government may choose at the end of the summer to extend the emergency measure that delays loan payments. President Joe Biden is also considering some form of loan forgiveness. Borrowers who take out new private student loans should be prepared to pay more. Rates vary by lender but are expected to go up.

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Associated Press reporters Ken Sweet, Tom Krecher, Adriana Morgan and Cora Lewis contributed to this report. Morgan and Lewis cover financial literacy for the Associated Press. The Associated Press receives support from the Charles Schwab Foundation for educational and interpretive reporting to improve financial literacy. The independent organization is separate from Charles Schwab and Co. The Associated Press is solely responsible for its journalism.

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