Here’s what the Fed interest rate hike means for you

NEW YORK (AP) – The Federal Reserve raised interest rates by a quarter point on Wednesday, taking them to their highest level in 15 years, as part of an ongoing effort to ease inflation by making borrowing more expensive.

The rate hike will likely make it even more expensive to borrow for homes, cars, and other purchases. But if you have money to save, chances are you’ll earn a little more interest on it.

The latest rate hike is smaller than the Fed’s half-point hike in December and its four consecutive three-quarter-point hikes earlier in the year. The slowdown reflects the fact that inflation, while still high, is easing and some parts of the economy appear to be cooling.

But it’s still up to a range of 4.5% to 4.75%. And many economists say they still fear a recession remains a possibility – and with it job losses that could plague households already hit by inflation.

Here’s what you should know:

WHAT DOES THE RATE INCREASE REQUIRE?

The short answer: inflation. Last year, consumer inflation in the United States was 6.5% — a number that reflects a sixth straight monthly slowdown but is still uncomfortably high.

The Fed’s goal is to curb consumer spending, thereby reducing demand for homes, cars, and other goods and services, ultimately cooling the economy and lowering prices.

Fed Chair Jerome Powell has acknowledged in the past that aggressively raising rates would cause “some pain” to households, but said it was necessary to quell high inflation.

WHICH CONSUMERS ARE MOST AFFECTED?

Anyone who borrows money to make a large purchase, such as a house, car, or large appliance, is likely to take a hit. The new interest rate will also increase monthly payments and costs for any consumer already paying interest on credit card debt.

“It’s already been a really tough year for people with credit card debt, and it’s only going to get worse,” said credit analyst Matt Schulz of LendingTree. “The immediacy of the increase is what’s difficult — that it affects not only future purchases, but current balances as well.”

However, Scott Hoyt, an analyst at Moody’s Analytics, noted that household debt payments remain relatively low relative to income, although they have been rising recently. Even if borrowing rates are steadily rising, many households may not immediately feel a much higher debt burden.

HOW WILL THIS AFFECT CREDIT CARD FEES?

Even before the Fed’s latest move, credit card lending rates were at their highest since 1996, according to Bankrate.com, and are likely to rise further.

There are also signs that Americans are increasingly relying on credit cards to sustain their spending. Total credit card balances have surpassed $900 billion, a record high, according to the Fed, although that amount isn’t adjusted for inflation.

“Right now, most people might have jobs and rising incomes, but they’re looking to the horizon and they’re seeing storm clouds gathering,” said Nationwide Senior Economist Ben Ayers. “It’s really a turning point for the economy.”

As interest rates have risen, zero-percent loans, marketed as “buy now, pay later,” have become popular with consumers. But longer-term loans of more than four payments that these companies offer are subject to the same elevated lending rates as credit cards.

For those who don’t qualify for low-interest credit cards due to poor credit scores, the higher interest rates are already impacting their balances.

John Leer, chief economist at Morning Consult, a survey research firm, said his survey suggests more Americans are spending the savings accumulated during the pandemic and using credit instead. Ultimately, rising interest rates could make it harder for these households to pay off their debts.

For those with home equity lines of credit or other adjustable-rate debt, rates will rise by about the same amount as the Fed hike, usually within a billing cycle or two. That’s because these interest rates are based in part on the banks’ benchmark rate, which tracks that of the Fed.

HOW ARE SAVERS INFLUENCED?

Soaring yields on high-yield savings accounts and certificates of deposit (CDs) have taken them to levels not seen since 2009, meaning households should increase their savings whenever possible. You can now also earn more from bonds and other fixed income investments.

Although savings, CD, and money market accounts typically don’t track Fed changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly large deposits.)

In general, banks tend to capitalize on a higher interest rate environment to increase profits by charging higher rates to borrowers without necessarily offering lower rates to savers.

WILL THIS AFFECT OWNERSHIP?

Last week, mortgage buyer Freddie Mac reported that the average interest rate on the benchmark 30-year mortgage fell to 6.13% from 6.15% the previous week. A year ago, the average rate was much lower: 3.55%. That means the interest rate on a typical home loan is still almost double what it was a year ago.

Mortgage rates don’t always move in line with the Fed’s reference rate. Instead, they tend to track the yield on the 10-year Treasury note.

Existing home sales have declined for 11 straight months as the cost of borrowing has become too high a hurdle for many Americans who are already paying far more for groceries, gas and other necessities.

WILL IT GET EASIER TO FIND A HOUSE IF I STILL WANT TO BUY?

If you are financially able to proceed with a home purchase, you likely have more options now.

WHAT IF I WANT TO BUY A CAR?

As the shortage of computer chips and other parts subsides, automakers produce more vehicles. Many even reduce prices or offer limited discounts. But rising lending rates and lower trade-in values ​​for used cars have wiped out much of the savings on monthly payments.

“With the interest you’re going to pay, those payments might not look too dissimilar to what they did a few months ago,” said Ivan Drury, director of insights at Edmunds.com. “It’s like every time we hear good news, we’re offset by bad news.”

Since the Fed began raising rates in March, the average new-car loan has risen from 4.5% to 6.9%, according to Edmunds data. Used car loans are up 2.5 percentage points to 10.6%. The average loan term is around 70 months – almost six years – for both new and used cars.

Edmunds says monthly payments have increased by an average of $71 to $728 for new vehicles since March. For used vehicles, it’s only $3 a month to $546.

Financing a new vehicle that averaged $48,516 in December now costs $8,769 in interest, Drury said. That’s enough to drive many out of the car market.

Any Fed rate hike is typically passed on to auto borrowers, though slightly offset by subsidized interest rates from manufacturers.

HOW HAVE PRICE RISE AFFECTED CRYPTO?

Cryptocurrencies like bitcoin have lost value since the Fed started raising interest rates. The same is true of many previously highly rated tech stocks.

Higher interest rates mean safe-haven assets like Treasuries are becoming more attractive to investors as their yields have risen. That makes risky assets like tech stocks and cryptocurrencies less attractive.

Nevertheless, Bitcoin continues to suffer from economic policy problems. Three major crypto firms have failed, most recently the high-profile FTX exchange, shaking crypto investor confidence.

WHAT ABOUT MY WORK?

The country’s employers continued hiring in December, adding a whopping 223,000 jobs. The unemployment rate fell to 3.5% from 3.6%, hitting a 53-year low. At the same time, employment growth was the smallest in two months, signaling a slowdown as wage growth is also moderating.

“Things are moderating and slowing down, but the job market is still relatively strong,” said Nick Bunker, economic research director at hiring site Indeed. “One of the reasons the Fed keeps raising rates is because it thinks the job market is too strong.”

Some economists argue that layoffs could slow rising prices and that a tight labor market is fueling wage growth and higher inflation.

While layoffs are now historically low, there’s also a possibility that there will simply be fewer job openings in the coming months.

“I think a lot of the hikes are behind us,” Bunker said. “But there is potential that the job market will deteriorate for some people, so people should watch out for a sustained slowdown.”

WILL THIS AFFECT STUDENT LOANS?

Borrowers taking out new personal student loans should be prepared to pay more when interest rates rise. The current range for federal loans is between about 5% and 7.5%.

However, federal student loan payments will be suspended interest-free until the summer of 2023 as part of an emergency measure introduced early in the pandemic. President Joe Biden has also announced certain loan forgiveness of up to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients — a guideline that is now being challenged in court.

IS THERE A CHANCE THE RATE RISE WILL BE REVERSED?

It is becoming increasingly unlikely that interest rates will fall any time soon.

“We expect inflation to be too high for the Fed even through the end of the year,” Nationwide’s Ayers said. “We don’t expect them to start cutting rates until next year.”

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AP business writers Christopher Rugaber in Washington, Tom Krisher in Detroit, and Damian Troise and Ken Sweet in New York contributed to this report.

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