The Federal Reserve is once again using its most powerful weapon to try to quell: raise interest rates. But the central bank’s move on Wednesday to raise borrowing costs means consumers and businesses are grappling with consecutive increases of three-quarters of a percentage point — a double-barrel cash explosion that could have a huge impact on your finances.
Sure, the Fed had raised interest rates in consecutive months before that, but two consecutive 0.75 percentage point increases are “very unusual,” noted Matt Schulze, senior credit analyst at Lending Tree. The Fed has not raised interest rates by a combined 1.5% in consecutive meetings since the 1980s.
Today’s rise marks the fourth rate increase this year, although inflation is still hitting a new highWhere prices jumped by 9.1%. However, there are signs that the Fed’s actions are affecting demand Amid a rise in mortgage rates, some consumers are postponing large purchases.
But with inflation still rising and the cost of credit rising, some economists fear higher interest rates could push the economy.
Schulz said whether the Fed will succeed in taming inflation “is a matter of billions of dollars”. “We certainly hope that this will work, but realistically the best thing people can do is assume these higher prices are going to be around for a while and plan accordingly.”
One thing is for sure:Some other types of loans will become more expensive for consumers.
Wednesday’s rate hike will increase the federal funds rate – the rate that determines interbank borrowing – to about 2.25% to 2.50%, above the pre-pandemic level of about 2%, according to Factset.
Here’s what higher Fed rates might mean for your budget.
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. So a rise of 0.75 percentage points on Wednesday means an additional $75 in interest for every $10,000 of debt.
So far, the Fed’s four hikes in 2022 have increased rates by a combined 2.25 percentage points — meaning consumers are now paying an additional $225 in interest on every $10,000 of debt.
Economists expect the Fed to continue its regime of raising interest rates, but the question is whether the increases will be more moderate. Currently, economists are linking a 0.5 percentage point increase in September, followed by two 0.25 percentage point increases in the last two Federal Reserve meetings of the year, according to Factset.
“They’re not going to stop anytime soon, but I don’t think we’re going to be in fifth for that long,” Schulz noted.
How another big rally could affect the stock market
The stock market has been hit this year amid the impact of high inflation and a string of Fed rate hikes.
Investors are awaiting the Federal Reserve’s hints about its plans after Wednesday’s hike, with many expecting the central bank to ease the scale of interest rate increases later this year, experts note.
markets [are] Craig Erlam, chief market analyst at OANDA, notes in a research note Wednesday ahead of the Fed’s decision, that pricing is now at a relatively quick turn in 2023 from extreme tightening to easing in order to support the economy. How long will the hawks last?”
Lines of credit for credit cards and equity
Schulz said credit card debt will become more expensive, with higher annual interest rates likely to hit borrowers in August.
In fact, credit card rates have already risen in response to the previous interest rate hike by the Federal Reserve, with the average new card rate now at 20.82%, according to LendingTree data. This is the highest average since at least August 2019.
“Next month, rates will almost certainly exceed 21% for the first time since we started tracking in 2019,” Schulz said. “That’s about the highest I’ve seen in the 14 years I’ve been monitoring credit card rates on a regular basis.”
This means that Americans carry a more expensive credit card balance, and people must take action to reduce their costs. First, consumers with balances may want to consider a 0% balance transfer credit card, Schulze said.
“The good news is that these offers are still widely available and plentiful if you have a good credit score,” Schulz noted. He noted that this would help consumers obtain credit scores of around 700 and above.
Second, consumers can call and ask their credit card companies to lower their rates, a request that succeeds about 70% of the time, he said.
Adjustable rate loans may also see an impact, including mortgage lines of credit and adjustable rate mortgages, which are based on the base rate.
How will another increase affect mortgage rates?
Homebuyers are already paying more for mortgages due to the Fed’s rate increases this year. The average 30-year home loan was 5.54% as of July 21, up from 3% a year earlier, according to Freddie Mac.
Because this addsTo purchase a property, the demand for a home decreases as some potential buyers are priced out of the market.
“[M]Jacob Channel, chief economist at LendingTree, noted in an email before the Fed’s announcement that mortgage rates could go higher over the next few weeks.
He added, “Today’s high rates have reduced borrowers’ demand for mortgage purchases and refinancing. In fact, demand for mortgages has reached a 22-year low.”
He added that borrowers still had to take the long-term view. “If you’re in a place now where you can buy a home without being burdened with too much of a cost, you don’t have to worry too much about whether or not prices will eventually come down,” Chanel said. “After all, even if interest rates fall over the coming years, you may still have a chance to refinance your existing loan.”
Savings accounts and CDs
If there’s a bright spot in another Fed hike, it’s for savers: The rates for savings accounts and certificates of deposit have risen sharply this year as a result of continued rate increases.
“Deposit rates are likely to rise as the Federal Reserve continues to increase rates,” Ken Tomin of DepositAccounts.com said in an email before the announcement. “However, savings account rates and short-term CD rates are more likely to rise than long-term CD rates so there is little, if any, advantage in rates with long-term CDs.”
Tumin noted that rates for online savings accounts actually jumped to 1.04% from 0.54% in May.
This is certainly better than what savers were getting, but it’s still well below the inflation rate. With inflation soaring over 9% in June, savers are essentially losing money by depositing their money into a savings account that earns around 1%.