Following a pause last month, experts anticipate a quarter-point rate increase by the Federal Reserve at the conclusion of its upcoming meeting next week.
Fed officials have made a commitment not to be complacent about the increasing cost of living, expressing repeated concern about its impact on American families.
Despite some cooling, inflation continues to stay well above the Fed’s 2% target.
From March 2022, the central bank has raised its benchmark rate 10 times to reach a targeted range of 5% to 5.25%, marking the swiftest pace of tightening since the early 1980s.
In the past year, the majority of Americans stated that rising interest rates have adversely impacted their finances. According to a report by WalletHub, around 77% confirmed being directly affected by the Fed’s actions. Additionally, a separate report by Allianz Life revealed that approximately 61% experienced a financial setback during this period, while only 38% reported benefiting from higher interest rates.
“Rising interest rates can be a double-edged sword,” explained Kelly LaVigne, vice president of consumer insights at Allianz Life. “Although savings accounts may earn more interest, borrowing money for significant expenses such as a home becomes costlier, and many Americans are concerned that rising interest rates signal a potential recession.”
Any rate increase by the Fed will lead to a corresponding hike in the prime rate, resulting in higher financing costs for various types of consumer loans.
Short-term borrowing rates are the first to rise. According to Columbia Business School economics professor Brett House, the cost of variable rate debt has already increased significantly. However, despite this, people continue to consume.
Nonetheless, House warned, “We are approaching the point where the surplus savings will be depleted, and the impact of rate hikes may bite swiftly.”
Below is a breakdown of how another rate increase might impact you, considering its effects on your credit card, car loan, mortgage, student debt, and savings deposits.
Given that many credit cards have variable rates tied to the Fed’s benchmark, any rate increase directly affects them. As the federal funds rate climbs, the prime rate also rises, subsequently leading to increased credit card rates.
According to a Bankrate report, the average credit card rate has now reached an all-time high of more than 20%. Additionally, credit card balances are higher, and nearly half of credit card holders carry debt from month to month.
Presently, the average rate for a home equity line of credit (HELOC) has surged to 8.58%, the highest in 22 years, as reported by Bankrate.
For homeowners with fixed 15-year and 30-year mortgage rates tied to Treasury yields and the economy, an immediate impact from a rate hike is not expected. Nevertheless, those in the market for a new home have experienced a notable reduction in purchasing power, partly due to inflation and the Federal Reserve’s policy decisions.
While auto loans are generally fixed, payments are increasing due to rising car prices and the higher interest rates on new loans.
For prospective buyers looking to purchase a new car in the coming months, the Federal Reserve’s actions might lead to a further uptick in the average interest rate for new car loans. Currently, the average rate on a five-year new-car loan has reached 7.2%, the highest in 15 years, as reported by Edmunds.
Federal student loan rates are fixed, so most borrowers won’t experience an immediate impact from the Fed’s actions. However, as of July, new direct federal student loans for undergraduate students will carry an interest rate of 5.50%, up from 4.99% in the 2022-23 academic year.
For now, individuals with existing federal education debt will benefit from a 0% interest rate until student loan payments resume in October.
On the other hand, private student loans typically have variable rates tied to benchmarks like Libor, prime, or Treasury bill rates. As the Fed increases rates, borrowers with private loans will see their interest costs rise, although the extent of the increase will vary depending on the chosen benchmark.
Although the Fed doesn’t directly influence deposit rates, they tend to be correlated with changes in the target federal funds rate. Savings account rates at major retail banks, which remained low during much of the Covid-19 pandemic, have now risen to an average of 0.42%.
Online savings accounts with top yields are currently offering rates over 5%, the highest since the 2008 financial crisis. Some short-term certificates of deposit (CDs) even exceed this, as reported by Bankrate.
However, according to Greg McBride, Bankrate’s chief financial analyst, if this is the Fed’s last rate increase for some time, yields might start to decline. As a result, McBride suggests that now is a favorable time to lock in higher rates.
Source : cnbc.com