Earlier this year, the Federal Reserve turned to its most potent weapon — raising interest rates — to combat soaring inflation. But with consumer prices having only accelerated since then, the central bankon Wednesday — its largest hike since 1994 — to try to tame the nation’s fiercest .
The rate hike follows the announcements of aand a — with the latter marking the sharpest increase since 2000.
The Fed had earlier been expected to boost rates by a more 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, surged 8.6% in May, from an 8.3% annual rate in April. Gasoline prices have continued to hit new highs almost daily amid depleted domestic production and Russia’s, while food and housing costs are also surging.
The idea behind the Fed’s rate hike is to make it costlier to borrow money, which in theory should tamp demand for purchases that require borrowing, like home buying or buying items with credit cards. With the latest rate increase, consumers and businesses should brace themselves for a hit to their wallet, experts say.
“The cost of borrowing is becoming more expensive, particularly for those with variable rate products,” said Mark Hamrick, senior economic analyst at Bankrate. “Fortunately, on the other side of the rate equation, returns on savings will likely be improving, particularly for those who investigate more generous high-yield savings options.”
By year-end, the federal funds rate — the rate that determines borrowing between banks — could be almost twice as high as its pre-pandemic level of about 2%, according to forecasts.
“It was just a few weeks ago that investors were forecasting the funds rate to be ~2.58% at the end of this year, but that number is now more than 100 [basis points] higher at 3.7%,” analyst Adam Crisafulli of Vital Knowledge told clients in a research note. “And the ‘terminal’ funds rate (the level at which the Fed will stop hiking this cycle) is now seen north of 4%.”
Here’s what the Fed jacking up interest rates could mean for your wallet.
What will the rate hike cost you?
Every 0.25% increase in the Fed’s benchmark interest rate translates to an extra $25 a year in interest on $10,000 in debt. So Wednesday’s 0.75% increase means an extra $75 of interest for every $10,000 in debt.
Economists expect the Fed will continue to raise rates throughout the year as it battles inflation. Some analysts now forecast the central bank will announce another 0.75% increase in July, followed by two 0.5% hikes in September and November.
By early 2023, the federal funds rate could be 3.75% to 4%, according to TD Macro. That implies a rate increase of at least 2.75% higher than 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 it impact the stock market?
The stock market hasamid various headwinds, including the impact of high inflation and the Fed’s monetary tightening. But a bigger-than-expected interest rate increase on Wednesday “could be welcomed by stocks,” Crisafulli said before the rate hike was announced.
“It would represent a powerful signal by [Fed Chair Jerome Powell], help the Fed recapture control of the policy narrative and clamp down on the massive change in tightening forecasts,” he noted.
The S&P 500 rose 15 points, or 0.4%, to 3,750 on Wednesday.
Credit cards, home equity lines of credit
Credit card debt will become more expensive, with higher APRs hitting borrowers within one or two billing cycles after the Fed’s announcement, according to LendingTree credit expert Matt Schulz. For instance, after the Fed’s March hike, interest rates for credit cards increased for three-quarters of the 200 cards that Schulz reviews every month.
Consumers with balances may want to consider a 0% balance transfer credit card or a low-interest personal loan, Schulz said. Consumers can also ask their credit card companies for a lower rate, which research has shown is frequently successful.
Credit with adjustable rates may also see an impact, including home equity lines of credit and adjustable-rate mortgages, which are based on the prime rate.
What’s the impact on mortgage rates?
Mortgage rates have already surged in response to the Fed’s rate increases this year. The average 30-year mortgage stood at 5.23% on June 9, according to Freddie Mac. That’s up from 2.96% a year earlier.
That is addingof buying a property. For instance, a purchaser buying a $250,000 home with a 30-year fixed loan would pay about $3,600 more per year compared with what they would have paid a year earlier.
The Fed’s newest rate hike might already be baked into current mortgage rates, said Jacob Channel, senior economic analyst for LendingTree, in an email.
“The Fed’s rate hike may not mean that mortgage rates are going to significantly increase,” he noted.
The housing market reflects one part of the economy where the Fed’s rate increases are slowing demand. Channel added: “These high rates have significantly dampened borrower desire to refinance current loans, and they’re also showing signs of reducing demand for purchase mortgages as well.”
Savings accounts, CDs
When it comes to higher interest rates, the bright side for consumers is better yields from savings accounts and certificates of deposit.
“Online deposit rate gains have accelerated after the last two Fed rate hikes. Further acceleration is expected” with additional hikes, said Ken Tumin of DepositAccounts.com in an email.
In May, the typical online savings account yield increased from 0.54% to 0.73%, while average yields on one-year online CDs rose from 1.70% to 2.53%, he noted.
That’s better than savers used to earn, but it’s still far below the rate of inflation. That means that savers are essentially eroding the value of their money by socking it into a savings account while inflation is running above 8%.