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The Federal Reserve Will Raise Interest Rates Again: How It Affects You


The Federal Reserve is expected to raise interest rates for the seventh time this year on Wednesday to combat stubborn inflation.

The US central bank will likely approve a 0.5 percentage point hike, a more typical pace compared to the large 75 basis point moves in each of the past four meetings.

This would push benchmark borrowing rates towards a target range of 4.25% to 4.5%. Although this is not the rate consumers pay, Fed decisions still affect the rates consumers see every day.

Why a lower rate hike may be ‘pretty good news’

By raising rates, the Fed makes it more expensive to take out a loan, forcing people to borrow and spend less, thereby dampening the economy and slowing the pace of price increases.

“For most people, this is pretty good news because prices are starting to stabilize,” said Laura Veldkamp, ​​professor of finance and economics at Columbia University Business School. “This will reassure households a lot.”

However, “there are households that will be affected by this,” she added, particularly those with variable rate debt.

For example, most credit cards have a floating rate, which means there is a direct link to the Fed’s benchmark rate.

But it does not stop there.

Learn more about personal finance:
Only 12% of adults and 29% of millionaires feel “rich”
35% of millionaires say they won’t have enough to retire
Inflation drives up US household spending by $433 a month

What the Fed’s rate hike means for you

Another increase in the prime rate will further increase the costs of financing many other forms of consumer debt. On the other hand, higher interest rates also mean that savers will earn more money on their deposits.

“Credit card rates are at an all-time high and continue to rise,” said Greg McBride, chief financial analyst at Bankrate.com. “Auto loan rates are at an 11-year high, home equity lines of credit are at a 15-year high, and the online savings account and CD [certificate of deposit] yields haven’t been this high since 2008.”

Here’s a breakdown of how benchmark interest rate increases have impacted everything from mortgages and credit cards to car loans, student debt and savings:

1. Mortgages

Although 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone buying a new home has lost considerable purchasing power, in part due to inflation and political measures. from the Fed.

“Although they are falling, mortgage rates are still at a more than 10-year high,” said Jacob Channel, principal economic analyst at LendingTree.

The average rate for a 30-year fixed-rate mortgage currently sits at 6.33%, down from mid-November when it peaked at 7.08%.

For potential buyers, a 30-year fixed-rate mortgage on a $300,000 loan would cost around $1,283 per month at last year’s rate of 3.11%. If you paid today’s 6.33% instead, it would cost $580 more per month or $6,960 more per year and $208,800 more over the life of the loan, Channel calculated.

Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are pegged to the prime rate. As the federal funds rate rises, the prime rate also rises, and those rates follow. Most ARMs adjust once a year, but a HELOC adjusts right away. Already, the average HELOC rate is up 7.3% from 4.24% earlier in the year.

2. Credit cards

Credit card annual percentage rates are now above 19%, on average, from 16.3% at the start of the year, according to Bankrate.

“Even those with the best credit card can expect to be offered APRs of 18% and higher,” said Matt Schulz, chief credit analyst at LendingTree.

But “fares aren’t just going up on new cards,” he added. “The rate you’re paying on your current credit card will likely go up as well.”

Additionally, households are increasingly relying on credit cards to afford basic necessities as incomes have not kept pace with inflation, making it even more difficult. for those who have a month-to-month balance.

If the Fed announces a 50 basis point hike as expected, the cost of existing credit card debt will rise by another $3.2 billion in the next year alone, according to new analysis from WalletHub.

3. Car loans

Even though car loans are fixed, payments go up because the price of all cars goes up along with interest rates on new loans. So if you are planning to buy a car, you will be shelling out more in the months to come.

The average interest rate on a five-year new car loan is currently 6.05%, down from 3.86% at the start of the year, although consumers with higher credit scores may be able to afford it. get better loan terms.

Paying an annual percentage rate of 6.05% instead of 3.86% could cost consumers about $5,731 more in interest over the life of a $40,000 auto loan over 72 months, data shows. ‘Edmunds.

Yet it’s not the interest rate but the vehicle’s list price that primarily causes an affordability crisis, McBride said.

4. Student loans

The interest rate on federal student loans taken out for the 2022-23 academic year has already fallen to 4.99%, down from 3.73% last year and 2.75% in 2020-21. It won’t budge until next summer: Congress sets the federal student loan rate each May for the upcoming academic year based on the 10-year Treasury rate. This new rate comes into effect in July.

Private student loans tend to have a variable rate linked to Libor, prime or Treasury bill rates – and that means that as the Fed raises rates, these borrowers also pay more interest. How much more, however, will vary with the reference.

Currently, average fixed rates for private student loans can range from 2.99% to 14.96% and 2.99% to 14.86% for variable rates, according to Bankrate. As with auto loans, they vary widely based on your credit score.

5. Savings accounts

On the upside, interest rates on some savings accounts are also higher after consecutive rate hikes.

While the Fed has no direct influence on deposit rates, rates tend to correlate with changes in the target federal funds rate. Savings account rates at some of the largest retail banks, which were near the bottom for most of the Covid pandemic, are now averaging 0.24%.

Thanks in part to lower overheads, rates for the best-performing online savings accounts are up to 4%, far higher than the average rate at a traditional bank, according to Bankrate.

“Interest rates can vary significantly, especially in the current interest rate environment in which the Fed has raised its benchmark rate to its highest level in more than a decade,” said Ken Tumin, founder of DepositAccounts.com.

“Banks make money off customers who don’t watch their interest rates,” Tumin said.

With balances from $1,000 to $25,000, the difference between the lowest and highest annual percentage return can result in an extra $51 to $965 in one year and $646 to $11,685 in 10 years, according to an analysis by DepositAccounts.

Yet any money earning less than the rate of inflation loses purchasing power over time.

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