How Federal Reserve Rate Hikes Affect Your Finances
Rising mortgage rates have dented home sales. Credit card rates have become heavier, as have car loans. Savers are finally receiving truly visible returns, while crypto assets are in shock.
Last week, the Federal Reserve’s decision to tighten credit further raised its benchmark interest rate by 0.75 percentage points for the second consecutive time. The Fed’s latest hike, its fourth since March, will further increase borrowing costs for homes, cars and credit cards, though many borrowers may not feel the impact immediately.
The central bank is aggressively raising borrowing costs in an attempt to slow spending, cool the economy and beat the worst inflation spike in two generations.
For now, Fed actions have ended an era of ultra-low rates that resulted from the Great Recession of 2008-2009 to help save the economy – then resurfaced during the brutal pandemic recession, when the Fed cut its benchmark rate to near zero.
Chairman Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in slowing demand for homes, cars and other goods and services. Spending cuts could then help bring inflation, recently measured at a four-decade high of 9.1%, back to the Fed’s 2% target.
Yet the risks are high. A series of higher rates could tip the US economy into recession. That would mean higher unemployment, rising layoffs and further downward pressure on stock prices.
How will all of this affect your finances? Here are some of the most frequently asked questions about the impact of rising rates:
I AM PLANNING TO BUY A HOUSE. WHAT’S HAPPENING WITH MORTGAGE RATES?
Rising interest rates torpedoed the housing market. Home loan rates have nearly doubled over the past year to 5.5%, although they have stabilized in recent weeks even as the Fed signaled that a credit crunch is likely.
That’s because mortgage rates don’t necessarily match Fed increases. Sometimes they even move in the opposite direction. Long-term mortgages tend to follow the yield of the 10-year treasury bill, which, in turn, is influenced by various factors. These factors include investors’ expectations for future inflation and global demand for US Treasuries.
Investors expect a recession to hit the US economy later this year or early next year. This would force the Fed to cut its benchmark rate in response eventually. The expectation that the Fed will have to reverse some of its hikes next year has helped reduce the 10-year yield from 3.5% in mid-June to around 2.8%.
WILL IT BE EASIER TO FIND A HOUSE?
Existing home sales have fallen for five consecutive months, while new home sales plunged in June. If you’re financially able to go ahead with buying a home, you’ll likely have more choices than you did a few months ago.
In many cities, the options are few. But the number of available homes across the country has started to rise after falling to low levels late last year. According to the National Association of Realtors, there are now 1.26 million homes for sale, up 2.4% from a year ago.
I NEED A NEW CAR. SHOULD I BUY ONE NOW?
Fed rate hikes generally make car loans more expensive. But other factors also influence these rates, including competition between automakers, which can sometimes lower borrowing costs.
Wednesday’s rate hike likely won’t affect new-vehicle sales much, as those buyers are mostly affluent customers whose relatively small hike won’t compress monthly payments, said Jonathan Smoke, chief economist at Cox Automotive. He said used-car buyers with weaker credit who pay higher loan rates could be affected.
“Many used-vehicle buyers are already feeling the effects of rising energy, food and rent prices acutely,” Smoke said.
He noted that used vehicle prices have started to drop and vehicle availability is starting to return to normal levels.
The full amount of a Fed rate hike doesn’t always trickle down to auto loans, according to Bankrate.com. New 60-month loans for new vehicles have risen about one percentage point this year to an average of 4.86%, Bankrate.com reports, while the 48-month used-vehicle rate rose just under 1 point to 5.38%.
WHAT WILL HAPPEN TO MY CREDIT CARD?
For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise by roughly the same amount as the Fed hike, typically within one or two billing cycles. That’s because those rates are based in part on the banks’ prime rate, which moves in tandem with the Fed.
Those who don’t qualify for low-rate credit cards may end up paying higher interest on their balance. The rates on their cards would increase as the prime rate does.
Fed rate hikes have already sent credit card lending rates above 20% for the first time in at least four years, according to LendingTree, which has been tracking data since 2018.
HOW WILL THIS AFFECT MY SAVINGS?
Now you can earn more on bonds, CDs and other fixed income investments. And it depends on where your savings, if you have any, are parked.
Savings, certificates of deposit and money market accounts generally do not follow Fed changes. Instead, banks tend to take advantage of a higher rate environment to try and boost their profits. They do this by charging higher rates to borrowers, without necessarily offering lower rates to savers.
But online banks and the like with high-yield savings accounts are often an exception. These accounts are known for their aggressive competition for depositors. The only problem is that they usually require large deposits.
HOW DID RATE HIKES INFLUENCE THE CRYPTO?
Like many popular tech stocks, cryptocurrencies like bitcoin have lost value since the Fed started raising rates. Bitcoin plunged from a high of around $68,000 to $21,000.
Higher rates mean that safe assets like bonds and Treasuries become more attractive to investors as their yields are now higher. This, in turn, makes risky assets like tech stocks and cryptocurrencies less attractive.
That said, bitcoin suffers from its own issues that are separate from economic policy. Two major crypto companies have failed. The shaken confidence of crypto investors is not helped by the fact that the safest place you can park money now – bonds – seems like a safer move.
WILL MY STUDENT LOAN PAYMENT INCREASE?
Currently, payments on federal student loans are suspended until August 31 as part of an emergency measure that was put in place at the start of the pandemic. Inflation means that loan holders have less income available to make payments. Still, a sluggish economy that reduces inflation could bring some relief in the fall.
Depending on the state of the economy, the government could choose at the end of the summer to extend the emergency measure that postpones loan repayments. President Joe Biden is also considering some form of loan forgiveness. Borrowers taking out new private student loans should be prepared to pay more. Rates vary by lender, but are expected to increase
Newsy is the only free 24/7 national news network. You can find Newsy using your TV’s digital antenna or streaming for free. See all the ways you can watch Newsy here.