by NEW YORK (AP) – The Federal Reserve’s decision to raise its policy rate by a half point on Wednesday moved it to a range of 4.25% to 4.5%, the highest level in 14 years.
The Fed’s latest hike — its seventh rate hike this year — will make it even more expensive for consumers and businesses to borrow for homes, cars and other purchases. If you have money to save, however, you will earn a little more interest.
Wednesday’s rate hike, part of the Fed’s push to curb high inflation, fell short of the previous four consecutive hikes by three-quarters of a point. The decline reflects, in part, the easing of inflation and the cooling of the economy.
As interest rates risemany economists say they fear a recession will remain inevitable – and with it, job losses that could cause hardship for households already badly hit by inflation.
Here’s what to know:
WHAT CAUSES RATES INCREASE?
The short answer: inflation. Over the past year, consumer inflation in the US stood at 7.1% – fifth consecutive monthly drop but still a painfully high level.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, ultimately cooling the economy and lowering prices.
Fed Chairman Jerome Powell acknowledged that aggressively raising interest rates would bring “some pain” to households, but that doing so is necessary to crush high inflation.
WHICH CONSUMERS ARE MOST AFFECTED?
Anyone who borrows money to make a large purchase, such as a house, car or large appliance, will take a hit, according to Scott Hoyt, an analyst at Moody’s Analytics.
“The new rate significantly increases your monthly payments and cost,” he said. “It also affects consumers who have a lot of credit card debt, which they will strike right away.”
That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, although they have picked up recently. So even as debt rates steadily rise, many households may not immediately feel a much heavier debt burden.
“I’m not sure interest rates are top of mind for most consumers right now,” Hoyt said. “They seem more concerned about spending and what’s happening at the gas pump. Tariffs can be a tricky thing for consumers to think about.
HOW DOES THIS AFFECT CREDIT CARD FEES?
Even before the Fed’s latest move, credit card lending rates had hit their highest level since 1996, according to Bankrate.com, and will likely continue to rise.
And with prices still rising, there are signs that Americans are increasingly relying on credit cards to keep up their spending. Total credit card balances have surpassed $900 billion, according to the Fed, a record, although that amount isn’t adjusted for inflation.
John Leer, chief economist at Morning Consult, a polling research firm, said his polls suggest more Americans are spending their savings accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.
Those who don’t qualify for low-rate credit cards due to weak credit scores are already paying significantly higher interest on their balances and will continue to do so.
As rates rise, zero percent loans marketed as “Buy Now, Pay Later” they have also become popular among consumers. But the long-term loans of more than four payments offered by these companies are subject to the same higher lending rates as credit cards.
For people who have home improvement lines or other variable-interest debt, rates will increase by roughly the same amount as the Fed’s hike, usually within a billing cycle or two. That’s because those rates are based in part on the banks’ prime rate, which follows that of the Fed.
HOW ARE SAVERERS AFFECTED?
Rising yields on high-yield savings accounts and certificates of deposit (CDs) have driven them to levels not seen since 2009, meaning households may want to boost savings if possible. Now you can also earn more on bonds and other fixed income investments.
While savings accounts, CDs, and money market accounts typically don’t track Fed changes, online banks and others that offer high-yield savings accounts may be exceptions. These institutions typically compete aggressively for depositors. (The catch: Sometimes they require significantly large deposits.)
In general, banks tend to capitalize on a higher rate environment to increase their profits by charging higher rates to borrowers, without necessarily offering higher rates to savers.
WILL THIS AFFECT HOME OWNERSHIP?
Last week, mortgage buyer Freddie Mac reported that the average rate on his 30-year benchmark mortgage fell to 6.33%. That means the rate on a typical home loan is still about double what it was a year ago.
Mortgage rates don’t always move in tandem with the Fed’s key rate. Instead, they tend to follow the yield on the 10-year Treasury bill.
Existing home sales fell for nine straight months as borrowing costs became too much of a barrier for many Americans who are already paying far more for food, gas and other necessities.
WILL IT BE EASIER TO FIND A HOME IF I’M STILL LOOKING TO BUY?
If you’re financially able to go ahead with buying a home, chances are you have more options than at any point in the past year.
WHAT IF I WANT TO BUY A CAR?
Since the Fed began raising rates in March, the average new-vehicle loan has jumped more than 2 percentage points, from 4.5% to 6.6% in November, according to automotive site Edmunds.com. Used vehicle loans grow by 2.1 percentage points to 10.2%. Loan terms for new vehicles average just under 70 months and have exceeded 70 months for used vehicles.
Most important, however, is the monthly payment, on which most people base their car purchases. Edmunds says it has increased an average of $61 to $718 for new vehicles since March. The average payment for used vehicles increased by $22 a month to $565.
Ivan Drury, director of insights at Edmunds, says financing the average new vehicle priced at $47,000 now costs $8,436 in interest. This is enough to kick many out of the car market.
“I think we’re actually starting to see that these interest rates are doing what the Fed wants,” Drury said. “They are taking away purchasing power so that you can no longer buy a vehicle. There will be fewer people who can afford it.”
Any rate hike from the Fed will likely be passed on to auto borrowers, although it will be offset slightly by manufacturers’ subsidized rates. Drury expects new vehicle prices to start declining next year as demand eases slightly.
HOW HAVE THE CRYPTO RATE RISES AFFECTED?
Cryptocurrencies like bitcoin have lost value since the Fed started hiking rates. As well as many formerly high-value tech stocks.
Higher rates mean that safe assets like Treasuries have become more attractive to investors because their yields have increased. This makes risky assets like tech stocks and cryptocurrencies less attractive.
However, bitcoin continues to suffer from problems separate from economic policy. Three major cryptocurrency firms have gone bankrupt, most recently the high-profile FTX exchange, shaking cryptocurrency investor confidence.
IT’S MY JOB?
Some economists argue that layoffs may be needed to slow price increases. One argument is that a tight job market fuels wage growth and higher inflation. But the nation’s employers continued to hire rapidly in November.
“Job opportunities continue to outpace hiring, which indicates that employers are still struggling to fill vacancies,” said Odeta Kushi, an economist at First American.
WILL THIS AFFECT STUDENT LOANS?
Borrowers taking out new private student loans should be prepared to pay more as rates rise. The current range for federal loans is approximately 5% to 7.5%.
That said, federal student loan payments are suspended interest-free through the summer of 2023 as part of a contingency measure put in place at the start of the pandemic. President Joe Biden also announced loan forgiveness, up to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients, a policy that is now being challenged in court.
IS THERE A POSSIBILITY THAT RATE INCREASES WILL BE REVERSED?
It seems increasingly unlikely that rates will fall anytime soon. The Fed signaled on Wednesday that it will raise its rate to around 5.1% early next year and hold it for the rest of 2023.
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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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The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.
