The Federal Reserve is expected to hike interest rates for the seventh time this year on Wednesday to fight stubborn inflation.
The Federal Reserve is likely to approve a 0.5 percentage point hike, a more typical pace compared to the super-large moves of 75 basis points at each of the past four sessions.
This would push benchmark lending rates down to a target range of 4.25% to 4.5%. While that’s not the rate consumers are paying, the Fed’s moves are still impacting the interest rates consumers see every day.
Why a smaller rate hike could be ‘pretty good news’
By raising interest rates, the Fed makes it more expensive to borrow, causing people to borrow less and spend less, effectively slowing the economy and slowing the pace of price increases.
“For most people, this is pretty good news because prices are starting to stabilize,” said Laura Veldkamp, professor of finance and economics at Columbia University Business School. “That will bring a lot of reassurance to households.”
“However, there are some households that will be affected,” she added – particularly those with adjustable-rate debt.
For example, most credit cards have a variable interest rate, meaning there is a direct link to the Fed’s reference rate.
But it doesn’t stop there.
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What the Fed’s rate hike means for you
A further increase in interest rates will further increase the cost of financing many other forms of consumer debt. On the flip side, higher rates also mean savers are making more money on their deposits.
“Credit card rates are at an all-time high and continue to rise,” said Greg McBride, chief financial analyst at Bankrate.com. “Auto loan interest rates are at an 11-year high, home equity lines of credit are at a 15-year high, and online savings accounts and CDs [certificate of deposit] Yields haven’t been this high since 2008.”
Here’s a breakdown of how increases in the benchmark interest rate have affected everything from mortgages and credit cards to car loans, student debt and savings:
1. Mortgages
Although 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, anyone buying a new home has lost significant purchasing power, in part due to inflation and Fed policy actions.
“Despite falling, mortgage rates are still at more than 10-year highs,” said Jacob Channel, senior economic analyst at LendingTree.
The average interest rate on a 30-year fixed-rate mortgage is currently 6.33%, down from the peak of 7.08% in mid-November.
For prospective buyers, a 30-year fixed-rate mortgage with a $300,000 loan would cost about $1,283 a month if last year’s interest rate was 3.11%. Paying today’s 6.33% instead would cost an additional $580 per month, or $6,960 per year, and another $208,800 over the life of the loan, Channel calculated.
Adjustable rate mortgages, or ARMs, and home equity lines of credit, or HELOCs, are tied to the prime rate. When the federal funds rate rises, so does the federal funds rate, and these interest rates follow suit. Most ARMs adjust once a year, but a HELOC adjusts instantly. The average rate for a HELOC is already 7.3% versus 4.24% at the start of the year.
2. Credit cards
According to Bankrate, credit card APRs are now averaging over 19%, up from 16.3% at the start of the year.
“Even those with the best credit cards can expect APRs of 18% and up,” said Matt Schulz, LendingTree’s chief credit analyst.
But “prices aren’t just going up for new cards,” he added. “The rate you pay on your current credit card is also likely to increase.”
Additionally, households are increasingly relying on credit cards to afford basic needs as incomes have not kept pace with inflation, making it even harder for those on a month-to-month balance.
If the Fed announces a 50 basis point hike as expected, the cost of existing credit card debt will increase by another $3.2 billion over the next year alone, according to a new analysis by WalletHub.
3. Auto Loans
Even though car loans are locked in, the payments keep getting larger 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 6.05%, up from 3.86% at the start of the year, although consumers with better credit ratings may be able to get better loan terms.
According to Edmunds data, paying an APR of 6.05% instead of 3.86% could cost consumers about $5,731 more in interest over the course of a 72-month $40,000 car loan.
Still, it’s not the interest rate but the vehicle’s sticker price that is causing an affordability crisis in the first place, McBride said.
4. Student Loans
The interest rate on federal student loans taken for the 2022-23 academic year has already increased to 4.99%, up from 3.73% last year and 2.75% in 2020-21. It won’t move until next summer: Congress sets the interest rate on federal student loans each May for the upcoming academic year based on the 10-year Treasury interest rate. This new tariff will come into effect in July.
Private student loans typically have a variable interest rate tied to the Libor, Prime, or Treasury bill interest rate — and that means these borrowers will also pay more interest if the Fed hikes rates. How much more, however, will vary by benchmark.
Currently, average fixed rates for personal student loans can range from 2.99% to 14.96%, and 2.99% to 14.86% for variable rates, according to Bankrate. As with car loans, they vary widely based on creditworthiness.
5. Savings Accounts
On the plus side, interest rates on some savings accounts are higher even after consecutive rate hikes.
While the Fed has no direct influence on deposit rates, rates tend to correlate with changes in the target federal funds rate. Savings account rates at some of the largest retail banks, which have been close to rock bottom for most of the Covid pandemic, are now averaging as low as 0.24%.
Thanks in part to lower overheads, high-yield online savings account rates are up to 4%, according to Bankrate, much higher than the average rate at a traditional bank.
“Interest rates can fluctuate significantly, especially in today’s interest rate environment, when the Fed has raised interest rates to their highest level in more than a decade,” said Ken Tumin, founder of DepositAccounts.com.
“Banks make money from customers who don’t monitor their interest rates,” Tumin said.
For balances from $1,000 to $25,000 is the difference between the lowest and the highest annual percentage yield can result in an additional $51 to $965 in one year and $646 to $11,685 in 10 years, according to DepositAccounts analysis.
Still, any money earning less than the inflation rate loses purchasing power over time.
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