How Federal Reserve Rate Hikes Affect Your Finances

WASHINGTON — Higher mortgage rates have pushed down home sales. Credit card rates have become more onerous, as have car loans. Savers are finally receiving returns that are truly visible, while crypto assets falter.

The Federal Reserve’s decision on Wednesday to further tighten credit raised its benchmark interest rate by 0.75 percentage point for the second consecutive time. The Fed’s latest hike, the fourth since March, will further increase the costs of home, auto and credit card loans, though many borrowers may not feel the impact right away.

The central bank is aggressively raising borrowing costs to try to slow spending, cool the economy and beat the worst bout of inflation in two generations.

The Fed’s actions have ended, for now, an era of ultra-low rates that emerged from the Great Recession of 2008-2009 to help rescue the economy, and then re-emerged during the brutal pandemic recession, when the Fed cut its interest rate. reference. to almost zero.

Chairman Jerome Powell hopes that by making borrowing more expensive, the Fed will curb demand for homes, cars and other goods and services. Cutting spending could then help bring inflation, most recently measured at a four-decade high of 9.1%, back to the Fed’s 2% target.

However, the risks are high. A series of higher rates could tip the US economy into a recession. That would mean higher unemployment, increased layoffs and further downward pressure on stock prices.

How will all this affect your finances? These are some of the most common questions about the impact of the rate hike:

Higher interest rates have torpedoed the housing market. Home loan rates have almost doubled from a year ago to 5.5%, though they have stabilized in recent weeks, even as the Fed has signaled more credit tightening is likely.

That’s because mortgage rates don’t necessarily move in tandem with Federal Reserve hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These factors include investor expectations about future inflation and global demand for US Treasuries.

Investors expect a recession to hit the US economy late this year or early next. This would force the Fed to eventually cut its benchmark rate in response. The expectation that the Fed will have to reverse some of its hikes next year has helped push the 10-year yield down from 3.5% in mid-June to about 2.8%.

Existing home sales have fallen for five straight months, while new home sales sunk in June. If you have the financial ability to go ahead with a home purchase, you probably have more options than you did a few months ago.

In many cities, the options are few. But the number of available homes across the country has started to rise after falling to rock-bottom levels late last year. There are now 1.26 million homes for sale, according to the National Association of Realtors, up 2.4% from a year ago.

Fed rate hikes often make car loans more expensive. But other factors also affect these rates, including competition among automakers, which can sometimes drive down borrowing costs.

Wednesday’s rate hike likely won’t hit new-vehicle sales much because those buyers are mostly wealthy customers who won’t be affected by a relatively small increase in monthly payments, said Jonathan Smoke, chief economist at Cox Automotive. Instead, he said, used car buyers with weaker credit who pay higher loan rates could be hurt.

“Many used vehicle buyers are already feeling the impacts of higher energy, food and rental prices acutely,” Smoke said.

Used vehicle prices have started to fall, he noted, and vehicle availability is beginning to return to normal levels.

The full amount of a Fed rate increase doesn’t always roll over to auto loans, according to New 60-month loans for new vehicles have risen about a percentage point this year to an average of 4.86%, says, while the 48-month used vehicle rate rose just under 1 point to 5.38%.

For users of credit cards, home equity lines of credit and other variable-rate debt, rates would rise by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on the banks’ prime rate, which moves along with the Federal Reserve.

Those who don’t qualify for low-interest credit cards could be forced to pay higher interest on their balances. Your card rates would increase as the prime rate does.

The Fed’s rate hikes have already sent credit card loan rates above 20% for the first time in at least four years, according to LendingTree, which has tracked data since 2018.

Now you can earn more on bonds, certificates of deposit and other fixed income investments. And it depends on where your savings are parked, if you have any.

Savings, certificates of deposit, and money market accounts do not typically track changes from the Federal Reserve. Instead, banks tend to take advantage of a higher rate environment to try to boost their profits. They do this by imposing higher rates on borrowers, without necessarily offering higher rates to savers.

But online banks and others with high-yield savings accounts are usually an exception. These accounts are known for aggressively competing for depositors. The only problem is that they usually require significant deposits.

Like many highly valued tech stocks, cryptocurrencies like bitcoin have lost value since the Fed started raising rates. Bitcoin has plunged from a peak around $68,000 to $21,000.

Higher rates mean that safe assets like bonds and Treasuries become more attractive to investors because their yields are now higher. That, in turn, makes risky assets like tech stocks and cryptocurrencies less attractive.

All that said, bitcoin is suffering from its own problems that are separate from economic policy. Two major crypto firms have gone bankrupt. The weakened confidence of crypto investors is not helped by the fact that the safest place you can deposit money right now (bonds) seems like a safer move.

At this time, federal student loan payments are suspended until August 31 as part of an emergency measure put in place early in the pandemic. Inflation means that loan holders have less disposable income to make payments. Still, a slowing economy that brings inflation down could provide some relief for the fall.

Depending on the state of the economy, the government may opt in late summer to extend the emergency measure that is deferring loan payments. President Joe Biden is also considering some form of loan forgiveness. Borrowers taking out new private student loans should be prepared to pay more. Rates vary by lender, but are expected to increase.

Associated Press writers Ken Sweet, Tom Krisher, Adriana Morga and Cora Lewis contributed to this report.

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