What a quarter-point rate hike by the US Federal Reserve means for you
The US Federal Reserve on Wednesday raised its target interest rate for the eighth consecutive time in a bid to curb persistent inflation.
at his latest meetingThe central bank approved a more modest 0.25 percentage point hike after recent signs that inflationary pressures were beginning to ease.
“Inflationary pressures are easing, but that doesn’t mean the Federal Reserve’s job is done,” said Greg McBride, chief financial analyst at Bankrate.com. “There’s still a long way to go to get to 2% inflation.”
What the Federal Funds Rate means to you
The Federal Funds Rate, set by the US Federal Reserve, is the rate at which banks lend and borrow money from each other overnight. While that’s not the rate consumers are paying, the Fed’s moves are still impacting the lending and savings rates they see every day.
This rate hike will coincide with a rise in the federal funds rate, immediately raising the cost of financing many forms of consumer borrowing – putting pressure on households already strained financially.
“Inflation has ripped through household budgets, and in many cases households have had to lean against credit cards to fill the gap,” McBride said.
On the other hand, “with interest rates still rising and inflation now falling, it’s the best of both worlds for savers,” he added.
How higher interest rates can affect your money
1. Your credit card rate will increase
Since most Credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the federal funds rate goes up, so does the federal funds rate, and your credit card rate follows within a billing cycle or two.
“Credit card interest rates are already at their highest in decades,” said Matt Schulz, chief credit analyst at LendingTree. “While the Fed is slowing down on rate hikes, credit card APRs are almost certain to continue to rise for at least the next few months, so it’s important that cardholders remain focused on reducing their debt.”
Credit card APRs are now averaging nearly 20%, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders are in debt month-to-month while also paying sky-high interest charges — “that’s a bad combination,” McBride said.
At more than 19%, if you make minimum payments on the average credit card balance — which TransUnion says is $5,474 — it would take you almost 17 years to pay off the debt and cost you more than $7,528 in interest, calculated bank rate.
Overall, this rate hike will cost credit card users at least one additional fee $1.6 billion of interest charges in 2023, according to a separate analysis by WalletHub.
“A credit card with 0% transfers remains one of the best weapons Americans have in fighting credit card debt,” advised Schulz.
Otherwise, consider consolidating and paying off high-yield credit cards with a lower-interest personal loan, he said. “Interest rates on new personal loan offers have also increased recently, but if you have good credit you may be able to find options that offer lower interest rates than what you currently have on your credit card.”
2. Mortgage rates remain higher
Interest rates on 15- and 30-year mortgages are fixed and linked to government bond yields and the economy. As economic growth has slowed, these interest rates have gradually declined but are still at 10-year highs, according to Jacob Channel, senior economist at LendingTree.
The average interest rate on a 30-year fixed-rate mortgage is now around 6.4% – almost 3 full percentage points up from 3.55% a year ago.
“Relatively high rates combined with persistently high property prices mean that home buying is still a challenge for many,” Channel said.
That rate hike has increased the cost of new mortgages by about 10 basis points, which translates to about $9,360 over the life of a 30-year loan, assuming the average home loan is $401,300, WalletHub found.
“We’re still a long way from the housing market being truly affordable, even though it’s gotten a little cheaper recently,” Channel said.
Other home loans are more closely linked to Fed actions. Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are tied to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts instantly. Already, the average rate for a HELOC is 7.65% versus 4.11% a year ago.
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3. Car loans are becoming more expensive
Even when car loans are fixed, the payments continue to increase as the price of all cars increases along with interest rates on new loans. So if you’re planning to buy a car, you’ll be shelling out more in the coming months.
The average interest rate on a five-year new car loan is currently 6.18%, compared to 3.96% last year.
The Fed’s latest move could push the average interest rate even higher, although consumers with better credit ratings may be able to get better loan terms or seek better deals on some used car models.
According to Edmunds data, paying an APR of 6% instead of 4% would cost consumers $2,672 more in interest over the course of a 72-month $40,000 car loan.
“The ever-increasing cost of financing remains a challenge,” said Ivan Drury, director of insights at Edmunds.
4. Some student loans are becoming more expensive
Federal student loan rates are also fixed, so most borrowers are not immediately affected by a rate hike. But if you’re about to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year is already up to 4.99%, up from 3.73% last year, and all after Loans disbursed July 1 are likely to be the same higher.
If you have a personal loan, those loans can be fixed or have a floating rate tied to Libor, Prime, or T-Bill interest rates — meaning borrowers are likely to pay more interest if the Fed interest rates increased, although how much more varies by benchmark.
Currently, average fixed interest rates on personal student loans can range from just under 4% to almost 15%, according to Bankrate. As with car loans, they also vary widely based on creditworthiness.
Right now, everyone with existing government education debt is benefiting from 0% interest rates until the payment freeze ends, which the Department of Education expects later this year.
What savers should know about higher interest rates
The good news is that interest rates on savings accounts are finally higher after the recent rate hikes.
While the Fed has no direct influence on deposit rates, they tend to correlate with changes in the target federal funds rate savings account rates at some of the largest retail bankswhich have been near rock bottom for most of the Covid pandemic are currently averaging up to 0.33%.
Thanks in part to lower overheads, high-yield online savings accounts rates are as high as 4.35%, much higher than the average rate at a traditional brick-and-mortar bank.
According to DepositAccounts.com, rates for one-year certificates of deposit at online banks are even higher and are now around 4.75%.
As the central bank continues its rate hike cycle, these yields will continue to rise as well. However, according to Yiming Ma, an assistant professor of finance at Columbia University Business School, you have to look around to take advantage of them.
“If you haven’t already, it’s really important to capitalize on the high-yield environment by earning a higher yield,” she said.
However, since the inflation rate is now higher than any of these rates, any savings lose purchasing power over time.
https://www.cnbc.com/2023/02/01/what-a-federal-reserve-quarter-point-interest-rate-hike-means-for-you.html What a quarter-point rate hike by the US Federal Reserve means for you