NEW YORK (AP) — The Federal Reserve raised its key interest rate by a half-point on Wednesday, bringing it to 4.25% to 4.5%, the highest level in 14 years.
The central bank’s latest increase — its seventh rate hike this year — will make it even more expensive for consumers and businesses to borrow money for homes, autos and other purchases. On the other hand, if you have money to save, you will earn a little more interest.
Wednesday’s rate hike was part of the central bank’s push to control high inflation, smaller than its previous four straight three-quarter-point increases. The easing of inflation reflects, in part, deceleration and the cooling of the economy.
As interest rates riseMany economists fear a recession is inevitable – and with it, job losses that could cause hardship for families already hit hard by inflation.
Here’s what you need to know:
What drives the rate to increase?
Short answer: inflation. Last year, consumer inflation in the US was 7.1%. – Fifth straight monthly decline but still painfully high.
The central bank’s goal is to reduce consumer spending, thereby reducing demand for homes, cars, and other goods and services, ultimately cooling the economy and lowering prices.
Federal Reserve Chairman Jerome Powell acknowledged that raising interest rates sharply would bring “some pain” to households, but that doing so was necessary to quell high inflation.
Which consumers are most affected?
According to Scott Hoyt, an analyst at Moody’s Analytics, anyone who takes out a loan to make a major purchase, such as a home, car or major appliance, wins.
“The new fee increases your monthly payments and your costs quite dramatically,” he said. “It also affects consumers with a lot of credit card debt — it hits right away.”
Hoyt noted that home loan payments, as a proportion of income, have remained relatively low even though they have risen recently. So even if loan rates rise steadily, many households may not immediately feel overburdened with debt.
“I’m not sure most consumers have interest rates on their minds right now,” Hoyt said. “They care more about groceries And what happens at the gas pump. Rates are a tricky thing for consumers to wrap their minds around.
How does this affect credit card rates?
Even before the bank’s latest move, credit card delinquency rates were at their highest level since 1996, according to Bankrate.com, and will continue to rise.
As prices continue to rise, there are signs that Americans are increasingly relying on credit cards to keep up with their spending. Total credit card balances have topped $900 billion, a record high, according to the Fed, although that amount is not adjusted for inflation.
John Lear, chief economist at Morning Consult, a survey research firm, said its poll found that more Americans are spending their savings during the pandemic and using debt instead. Ultimately, rising rates will make it harder for those families to pay off their debt.
People who don’t qualify for low-rate credit cards because of weak credit scores are already paying significantly more interest on their balances, and will continue to do so.
As rates have risen, zero percent loans are being marketed as “buy now, pay later.” They have also become popular among consumers. But long-term loans of more than four payments offered by these companies are subject to the same increased loan rates as credit cards.
For people with a home equity loan or other variable-rate loan, rates increase by the same amount as the Fed raises, usually within one or two billing cycles. That’s because those rates are based on the banks’ prime rate, which follows the central bank.
How are savers affected?
Rising returns on high-yield savings accounts and certificates of deposit (CDs) have kept them at levels not seen since 2009, meaning households may want to boost savings if possible. You can now earn more in bonds and other fixed income investments.
While savings, CDs, and money market accounts generally don’t track the Fed’s changes, online banks and others that offer high-yield savings accounts may be exceptions. These institutions usually compete vigorously for depositors. (The catch: sometimes a higher deposit is required.)
In general, banks tend to use the high-rate environment to maximize their profits by charging higher rates to borrowers rather than offering juicer rates to savers.
Does this affect home ownership?
Last week, mortgage broker Freddie Mac reported that the average rate on a 30-year mortgage fell to 6.33%. That means the rate for a conventional home loan is still double what it was a year ago.
Mortgage rates don’t always move in tandem with the Fed’s benchmark rate. They tend to track the yield on the 10-year Treasury note instead.
Sales of existing homes fell for the ninth consecutive month as borrowing costs became too prohibitive for many Americans who already pay more for food, gas and other necessities.
If I still plan to buy, will it be easier to find a house?
If you can afford to pursue a home purchase financially, you will have more options than at any time in the past year.
What if I want to buy a car?
According to auto site Edmunds.com, the average new-vehicle loan has risen more than 2 percentage points since the Fed began raising rates in March, from 4.5% in November to 6.6%. Used car loans increased by 2.1 percentage points to 10.2%. Loan tenure for new vehicles is less than 70 months on average, and 70 months for used vehicles.
Most important, however, is the monthly payment, which most people base their car purchase on. Since March, Edmonds says the average price for new vehicles has risen from $61 to $718. The average price for a used vehicle increased by $22 per month to $565.
Evan Drury, Edmonds’ director of insights, says the average new vehicle costing $47,000 now costs $8,436 in interest. That’s enough to drive many people away from the auto market.
“I think we’re really starting to see that these interest rates are doing what the Fed wants them to do,” Drury said. “They take away purchasing power because you can’t afford a vehicle anymore. There’s going to be fewer people who can afford it.
Any rate increase by the central bank will be passed on to auto borrowers, although some will be offset by subsidized prices from manufacturers. Drury predicts that new vehicle prices will begin to fall next year as demand eases a bit.
How did the price hike affect crypto?
Cryptocurrencies like Bitcoin have fallen in value since the central bank started raising rates. So have many formerly high-value tech stocks.
Higher rates mean safer assets like Treasuries have become more attractive to investors because their yields have increased. This makes riskier assets like tech stocks and cryptocurrencies attractive.
However, Bitcoin continues to suffer from issues other than economic policy. Three major crypto companies have failed, most recently the high-profile FTX exchange, shaking the confidence of crypto investors.
What about my job?
Some economists argue that layoffs are necessary to curb inflation. One argument is that a tight labor market spurs wage growth and higher inflation. But the nation’s employers hired briskly in November.
“Job openings continue to outpace hiring, indicating that employers are still struggling to fill vacancies,” said Odeda Kushi, economist at First American.
Will it affect student loans?
Borrowers taking out new private student loans should be prepared to pay more when rates rise. The current range for federal loans is around 5% to 7.5%.
Payments on federal student loans have been suspended with zero interest until the summer of 2023 as part of an emergency measure early in the pandemic. President Joe Biden has announced some loan forgiveness of up to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients — an amount that is now being challenged in the courts.
Is there a chance to reverse the fare hike?
Rates are unlikely to drop anytime soon. On Wednesday, the central bank signaled it would raise its rate to around 5.1% early next year — and keep it there until late 2023.
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AP business writers Christopher Rugaber in Washington, Tom Krisher in Detroit and Damian Trois and Ken Sweet in New York contributed to this report.
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