What the Fed’s latest rate hike means for your money?

The Federal Reserve is once again using its most powerful weapon to highest inflation in 40 years: interest rate hikes. But the central bank’s move Wednesday to further raise borrowing costs means consumers and businesses are grappling with sequential increases of three-quarters of a percentage point — a double flow of money that could have a major impact on your finances.

Sure, the Fed has raised rates in consecutive months before, but two 0.75 percentage point hikes in a row “is pretty extraordinary,” noted Matt Schulz, chief credit analyst at Lending Tree. The Fed has not raised interest rates by a combined 1.5% percentage point in successive meetings since the 1980s.

Today’s hike marks the fourth rate hike this year, although inflation is still hitting new levels record in June, with prices rising 9.1%. Still, there are signs that the Fed’s actions are affecting demand, with: home sales fall amid a spike in mortgage rates and some consumers delaying major purchases.

But with inflation still high and credit getting more expensive, some economists fear the rate hikes could propel the economy in a recession.

Whether the Fed will succeed in curbing inflation “is a multi-billion dollar question,” Schulz said. “We’re certainly hopeful that this will work, but realistically the best thing people can do is assume these high prices will be around for quite some time and plan accordingly.”

One thing is certain: credit card debt and some other types of loans will become more expensive for consumers.

Wednesday’s rate hike will raise the Federal Funds rate — the rate that determines interbank lending — to about 2.25% to 2.50%, which is above pre-pandemic levels of about 2%, according to the report. fact set.

Here’s what the Fed’s inflated interest rates can mean for your budget.


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What rate increases will cost you?

Every 0.25 percentage point increase in the Fed’s benchmark interest rate translates into an additional $25 per year on $10,000 in debt. So Wednesday’s 0.75 percentage point increase means $75 extra in interest for every $10,000 in debt.

So far, the Fed’s four rate hikes in 2022 have raised interest rates by a total of 2.25 percentage points — meaning consumers are now paying an additional $225 in interest on every $10,000 in debt.

Economists expect the Federal Reserve to continue its rate hike regime, but it remains to be seen whether the hikes will be more moderate. Currently, economists expect a 0.5 percentage point increase in September, followed by two 0.25 percentage point increases in the last two Fed meetings of the year, according to Factset.

“They don’t stop quickly, but I don’t think we’ll be in 5th gear for that long,” Schulz noted.

How another big surge could affect the stock market?

The stock market has taken a big dent this year due to the impact of high inflation and the Fed’s series of rate hikes.

Investors await hints from the Fed about its plans after Wednesday’s hike, and many expect the central bank to ease the size of its rate hikes later this year, experts note.

the “markets” [are] is now praising a relatively rapid 2023 reversal from aggressive tightening to easing to support the economy,” Craig Erlam, senior market analyst at OANDA, said in a research note Wednesday ahead of the Fed’s decision. will stay.”

Credit cards and credit lines for equity

Credit card debt will become more expensive, with higher APRs likely to hit borrowers in August, Schulz said.

Indeed, credit card rates have already risen in response to the Fed’s past rate hikes, with the average rate on a new card now at 20.82%, according to data from LendingTree. That is the highest average since at least August 2019.

“Next month, rates will almost certainly exceed 21% for the first time since we started tracking in 2019,” Schulz said. “That’s about the highest I’ve seen in 14 years of regularly looking at credit card rates.”

That means it’s more expensive for Americans to carry a credit card balance, and it should push people to take action to cut their costs. First, consumers with a balance may consider a credit card for 0% balance transfer, Schulz said.

“The good news is that those offers are still widely available and plentiful if you have a good credit score,” noted Schulz. That would help consumers with credit scores of about 700 and above, he noted.

Second, consumers can call and ask their credit card companies to lower their rates, a request that is successful about 70% of the time, he added.

Loans with adjustable rates can also have an impact, including lines of equity credit and adjustable-rate mortgages, which are based on the prime rate.

How will another hike affect mortgage rates?

Home buyers are already paying more for mortgages due to the Fed’s rate hikes this year. The average 30-year home loan stood at 5.54% on July 21, up from 3% a year earlier, according to Freddie Mac.

Because that is adding thousands of dollars in annual costs of buying a property, the demand for housing decreases as some potential buyers are priced out of the market.

“[M]Mortgage rates could rise in the coming weeks,” Jacob Channel, senior economist for LendingTree, noted in an email ahead of the Fed’s announcement.

He added, “Today’s high rates have dampened borrower demand for both mortgage purchases and refinancing. In fact, mortgage demand has just hit its lowest point in 22 years.”

Still, borrowers should have a long-term view, he added. “Now if you’re in a place where you can afford to buy a house without too much expense, then you shouldn’t worry too much about whether or not rates may eventually come down.” Channel said. “Because even if interest rates fall in the coming years, you may still have the option to refinance your current loan.”

Savings accounts, CDs

If there’s one bright spot in a next Fed rate hike, it’s for savers: Savings and certificates of deposit rates have risen sharply this year as a result of ongoing rate hikes.

“Deposit rates are likely to rise as the Fed continues to raise rates,” DepositAccounts.com’s Ken Tumin said in an email ahead of the announcement. “However, savings account and short-term CD rates will likely increase more than long-term CD rates until there is little or no rate advantage with long-term CDs.”

Rates for online savings accounts have already risen from 0.54% in May to 1.04%, Tumin noted.

That’s certainly better than what savers used to get, but it’s still well below inflation. With inflation over 9% in June, savers are essentially losing money by depositing their money in a savings account and earning about 1%.

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