Earlier this year, the Federal Reserve turned to its most powerful weapon – raising interest rates – to combat rising inflation. However, as consumer prices have only accelerated since then, the central bank hiked interest rates by 0.75% on Wednesday, the biggest hike since 1994, in an attempt to tame the fiercest inflation battle in 40 years.
The rate hike follows announcements of a 0.25% hike in March and 0.5% in May – the latest hike being the largest since 2000.
The Fed was previously expected to hike rates by a modest 0.5%, but the bank opted for a larger hike after the consumer price index, a broad basket of goods and services used to track inflation, fell in April May was up 8.6% from 8.3%. annual rate in April. Gasoline prices are hitting new highs almost daily due to depletion of domestic production and the Russian war in Ukraine, while food and housing costs are also rising sharply.
The idea of raising Fed rates is to make borrowing more expensive, which in theory should dampen demand for purchases that require borrowing, such as the United States. B. Buying a home or buying things with credit cards. With recent rate hikes, consumers and businesses should be ready to dig into their wallets, experts say.
“The cost of borrowing is becoming increasingly expensive, especially for those who have variable rate products,” said Mark Hamrick, chief economic analyst at Bankrate. “Fortunately, on the other side of the interest rate equation, the return on savings is likely to improve, particularly for those considering more generous high-yield savings options.”
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By the end of the year, the federal funds rate — the rate that governs interbank lending — could be nearly double what it was before the pandemic, when it was around 2%.
“Just a few weeks ago, investors were predicting that the fund rate would be ~2.58% by the end of this year, but that number is now over 100. [basis points] higher to 3.7%,” said Vital Knowledge analyst Adam Crisafulli in a research note. And the “final” interest rate (the level at which the Fed stops continuing this cycle) is now north of 4%.
Here’s what the Fed can do to raise interest rates for your wallet.
How much does the tariff increase cost you?
Each 0.25% increase in the Fed’s benchmark interest rate translates into an additional $25 per year at $10,000 in interest. So Wednesday’s 0.75% hike means an additional $75 in interest for every $10,000 in debt.
Economists expect the Fed to hike rates again later this year to fight inflation. Some analysts are now predicting that the central bank will announce another 0.75% hike in July, followed by two 0.5% hikes in September and November.
According to TD Macro, the federal funds rate could be anywhere from 3.75% to 4% in early 2023. This means a rate increase of at least 2.75% over the current federal funds rate of 1%. For consumers, that means they could pay an additional $275 in interest for every $10,000 in debt.
How could this affect the stock market?
The stock market has plummeted this year on a variety of headwinds, including the impact of high inflation and the Fed’s tightening policy. However, stocks were expecting a welcome rate hike on Wednesday, Crisafulli said before announcing the rate hike.
“That would be a strong signal [Fed Chair Jerome Powell]”Help the Fed regain control of the policy narrative and contain the massive changes in forecast tightening,” he said.
The S&P 500 index rose 15 points, or 0.4%, to 3,750 on Wednesday.
Credit cards, domestic equity lines of credit
Credit card debt will become more expensive as higher APRs affect borrowers within a billing cycle or two of the Fed’s announcement, according to LendingTree credit expert Matt Schulz. For example, after the Fed’s March hike, credit card rates rose on three-quarters of the 200 cards Schulz checks each month.
Consumers with balances should consider a 0% credit card with a balance transfer or a low-interest personal loan, Schulz said. Consumers can also ask their credit card companies for a lower rate, which the survey found is often successful.
Variable rate loans can also have an impact, including equity lines of credit and basic mortgages that are based on a base rate.
How will this affect mortgage rates?
Mortgage rates have already risen sharply in response to this year’s Fed rate hike. According to Freddie Mac, the average 30-year mortgage was 5.23% on June 9th. This is up from 2.96% a year ago.
That means adding thousands to the annual cost of buying a property. For example, a buyer buying a $250,000 home on a 30-year fixed-rate loan would pay $3,600 more per year than they would have paid the year before.
The recent Fed rate hike may already feed into current mortgage rates, Jacob Channel, LendingTree’s chief economic analyst, said in an email.
“An increase in Fed rates does not necessarily mean that mortgage rates will rise significantly,” he said.
The housing market reflects a part of the economy where rising Fed rates are holding back demand. Channel added, “These high interest rates have significantly dampened borrowers’ desire to refinance current loans and are also showing signs of reduced demand for mortgages.”
Savings accounts, CD
When it comes to higher interest rates, the benefits for consumers are better returns on savings accounts and certificates of deposit.
“Interest gains on online deposits have accelerated after the Fed’s last two rate hikes. Further acceleration is expected,” said Ken Tumin of DepositAccounts.com in an email detailing further increases.
In May, the yield on a typical online savings account rose to 0.73% from 0.54%, while average yields on online one-year CDs rose to 2.53% from 1.70%, he noted.
That’s better than savers, but still well below inflation. This means savers are essentially reducing the value of their money by putting it in a savings account while inflation is above 8%.