NEW YORK (AP) — The Federal Reserve’s decision on Wednesday to raise its key rate by half a point took 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 more expensive for consumers and businesses to borrow for homes, automobiles and other purchases. If, on the other hand, you have money to spare, you will earn a little more interest.
Wednesday’s rate hike, part of the Fed’s push to rein in high inflation, trailed its previous four consecutive increases by three-quarters of a point. Downgrade reflects, in part, slowing inflation and the cooling of the economy.
As interest rates risemany economists say they fear a recession remains inevitable — and with it, job losses that could hurt households already hard hit by inflation.
Here’s what you need to know:
WHAT CAUSES THE RATE INCREASES?
The short answer: inflation. Over the past year, consumer inflation in the United States has reached 7.1% – the fifth consecutive monthly decline but still at a painfully high level.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars, and other goods and services, which will eventually cool the economy and lower prices.
Fed Chairman Jerome Powell acknowledged that aggressively raising interest rates would cause “some pain” for households, but it is necessary to crush high inflation.
WHICH CONSUMERS ARE MOST CONCERNED?
Anyone who borrows money to make a big purchase, like a house, car or major appliance, will take a hit, according to Moody’s Analytics analyst Scott Hoyt.
“The new rate significantly increases your monthly payments and your costs,” he said. “It also affects consumers who have a lot of credit card debt – it will hit right away.”
That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, although they have been increasing of late. So even if borrowing rates rise steadily, many households may not immediately feel much more indebted.
“I’m not sure interest rates are a priority for most consumers right now,” Hoyt said. “They seem more worried about groceries and what happens at the gas pump. Tariffs can be a difficult thing for consumers to understand. »
HOW WILL THIS AFFECT CREDIT CARD RATES?
Even before the Fed’s latest decision, credit card lending rates had reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.
And with prices still rising, there are signs that Americans are increasingly relying on credit cards to keep spending down. Total credit card balances topped $900 billion, the Fed said, a record high, though that amount isn’t adjusted for inflation.
John Leer, chief economist at Morning Consult, a polling firm, said his poll suggests more Americans are spending the savings they’ve accumulated during the pandemic and using credit instead. Ultimately, the rise in interest rates could make it more difficult for these households to repay their debts.
Those who don’t qualify for low-rate credit cards due to low credit scores are already paying much higher interest on their balances, and they will continue to do so.
As Rates Rise, Zero Percent Loans Are Being Marketed As “Buy Now, Pay Later” have also become popular with consumers. But the longer-term loans of more than four installments that these companies offer are subject to the same premium borrowing rates as credit cards.
For people with home equity lines of credit or other variable-interest debt, rates will rise 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 the banks’ prime rate, which tracks the Fed’s rate.
HOW ARE SAVERS AFFECTED?
Rising yields on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, meaning households may want to boost their savings if possible. You can also now earn more on bonds and other fixed income investments.
Although savings accounts, CDs, and money market accounts generally do not follow Fed changes, online banks and others that offer high-yield savings accounts may be exceptions. These institutions generally compete aggressively to attract depositors. (The catch: they sometimes require very high deposits.)
In general, banks tend to take advantage of a higher rate environment to increase their profits by charging higher rates to borrowers, without necessarily offering better rates to savers.
WILL THIS AFFECT THE PROPERTY?
Last week, mortgage buyer Freddie Mac announced that the average rate on the benchmark 30-year mortgage had fallen to 6.33%. This means that the rate for a typical home loan is still about twice as expensive as it was a year ago.
Mortgage rates do not always move in tandem with the Fed’s benchmark rate. Instead, they tend to follow the yield of the 10-year Treasury note.
Sales of existing homes have fallen for nine straight months as borrowing costs have become too much of a hurdle for many Americans who are already paying far more for food, gas and other necessities.
WILL IT BE EASIER TO FIND A HOUSE IF I’M STILL LOOKING TO BUY?
If you’re financially able to make a home purchase, you’ll likely have more options than at any time in the past year.
WHAT IF I WANT TO BUY A CAR?
Since the Fed began raising rates in March, the average loan for a new vehicle has jumped more than 2 percentage points, from 4.5% to 6.6% in November, according to automotive site Edmunds. com. Used vehicle loans were up 2.1 percentage points to 10.2%. Loan terms for new vehicles average just under 70 months, and have exceeded 70 months for used vehicles.
Most important, however, is the monthly payment, which most people base their car purchases on. Edmunds says since March, it’s increased an average of $61 to $718 for new vehicles. The average payment for used vehicles is up $22 per month to $565.
Edmunds knowledge manager Ivan Drury says financing an average new vehicle with a price tag of $47,000 now costs $8,436 in interest. That’s enough to drive many out of the car market.
“I think we’re actually starting to see that these interest rates, they’re doing what the Fed wants,” Drury said. “They take away the buying power so you can’t buy a vehicle anymore. There will be fewer people who can afford it.
Any rate hike by the Fed will likely be passed on to auto borrowers, though it will be slightly offset by subsidized rates from manufacturers. Drury predicts that prices for new vehicles will start falling next year as demand eases a bit.
HOW DID RATE HIKES INFLUENCE THE CRYPTO?
Cryptocurrencies like bitcoin have lost value since the Fed started raising rates. The same is true for many previously popular tech stocks.
Higher rates mean that safe assets like Treasuries have become more attractive to investors as their yields have risen. This makes risky assets like tech stocks and cryptocurrencies less attractive.
Yet bitcoin continues to suffer from issues separate from economic policy. Three major crypto firms have failed, most recently the top-tier FTX exchange, shaking crypto investor confidence.
WHAT ABOUT MY JOB?
Some economists argue that layoffs may be needed to slow rising prices. One of the arguments is that a tight labor market fuels wage growth and higher inflation. But the country’s employers continued to hire briskly in November.
“Job postings continue to outpace hiring, indicating that employers are still struggling to fill vacancies,” said Odeta Kushi, economist at First American.
WILL THIS AFFECT STUDENT LOANS?
Borrowers taking out new private student loans should be prepared to pay more as rates rise. The current federal loan range is between about 5% and 7.5%.
That said, payments on federal student loans are suspended without interest until the summer of 2023 as part of an emergency measure put in place at the start of the pandemic. President Joe Biden also announced loan forgiveness, of up to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients – a policy that is now being challenged in court.
IS THERE ANY CHANCE THE RATE HIKES ARE REVERSED?
It looks increasingly unlikely that rates will drop any time soon. On Wednesday, the Fed announced it would raise its rate to around 5.1% early next year — and hold it there for the rest of 2023.
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AP Business Writers Christopher Rugaber in Washington, Tom Krisher in Detroit, and Damian Troise and Ken Sweet in New York contributed to this report.
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The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reports aimed at improving financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
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