Here’s what will cost more as the Fed raises interest rates

By on June 15, 2022 0

Topline

The Federal Reserve authorized the biggest interest rate hike in 28 years on Wednesday, as part of its effort to tackle the fastest price hike in four decades. The doubling of a series of rate increases that is already making a slew of debt deals – including some student loans, credit cards and new mortgages – more expensive.

Highlights

“Now is the time to aggressively pay off high-cost credit cards,” Bankrate chief financial analyst Greg McBride said in emailed comments, pointing out that almost all credit cards come with a match. variable interest rates that fluctuate in parallel with the fed funds rate determined by the Fed.

Fueled by Fed hikes, mortgage rates have risen to their highest level since the Great Recession, rising from nearly 3.8% at the start of the year to over 6% last week, and pushing the payment average monthly mortgage around $600.

As a result, many mortgage companies are already suffering from a drop in demand, and NerdWallet’s Holden Lewis says this should “soon” usher in a slowdown in house price growth, although the shortage of homes available at selling (still a third of normal levels) will likely help keep prices fairly high.

Although federal student loans are issued at fixed rates (meaning existing loans will not be affected), private loans, which represent about 8% of the market with some $131 billion in outstanding loans, are often with floating rates that rise after the Fed. hikes.

A few rate hikes alone are unlikely to have a huge effect on smaller items, including auto finance, but big banks including Bank of America, Wells Fargo and JPMorgan began raising rates on Wednesday. prime interest, which is used to calculate borrowing costs, at 4.75%, compared to around 3.25% two years earlier.

A bright spot? “The outlook for savers is improving,” McBride says, noting that high-yield savings accounts and certificates of deposit will boost payouts, even though most banks “are likely to be stingy in passing on rates higher”.

crucial quote

“Rising interest rates mean borrowing is more expensive and saving will end up paying more,” McBride says, adding that households should take steps to “stabilize their finances,” including paying off cards expensive credit and other variable rate debt, and strengthening emergency measures. savings. “Both will make you more resilient to rising interest rates and whatever else might come next economically.”

Peg News

At the end of their two-day policy meeting on Wednesday afternoon, Fed officials said the central bank would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend. reserves, by 75 basis points to a target range of 1.5% to 1.75%, the biggest increase since 1994 after a 50 basis point increase last month. Experts only started to expect the rise after last month’s annual inflation reading unexpectedly hit a 40-year high of 8.6%.

To monitor

Although he had previously ruled out a 75 basis point hike, Fed Chairman Jerome Powell said Wednesday that another such hike was on the table for July 27, when the next central bank policy meeting.

Large number

$15.9 trillion. That’s the amount of US household debt at the end of the last quarter – the highest amount on record, according to the New York Federal Reserve. Although most of it is contained in fixed-rate housing debt, the overall figure has increased at the fastest rate in 14 years, with rapidly rising house and auto prices helping to reduce debt by more than 1,000 billions of dollars over the past year.

Further reading

Fed authorizes biggest interest rate hike in 22 years to fight inflation amid ‘sharp’ sell-off in stocks (Forbes)

Has inflation peaked? The Fed’s favorite indicator may be saying so, despite another ‘surprising’ reading (Forbes)

Stocks Could Plunge Another 15% After Fed-Spurred Selloff — Will the Economy Fall into a Recession? (Forbes)