If, as expected, if The Federal Reserve raises interest rates Again on Wednesday as it seeks to calm inflation, much of America will be directly affected.
Prices for credit cards, mortgages and auto loans, which have been on the rise since the Fed began raising interest rates last year, are expected to rise even further. The result will be onerous loan costs for both consumers and businesses.
On the other hand, many banks now Offer higher rates on savings accountsgiving savers the opportunity to earn more interest.
Despite this, economists worry about whether the Fed’s line of 10 rate hikes since March 2022 will ultimately cause the economy to slow down too much and cause stagnation.
Here’s what you should know:
What drives the rate increase?
The short answer: inflation. Inflation has been slowing in recent months, but it is still high. Consumer prices were measured more than a year ago 5% in Marchdown sharply from February’s 6% year-over-year increase.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars, and other goods and services, and ultimately to cool the economy and lower prices.
Fed Chairman Jerome Powell has acknowledged in the past that aggressively raising interest rates would bring “some pain” to households, but said doing so was necessary to crush soaring inflation.
Who is most affected?
Anyone who borrows money to make a major purchase, such as a house, car, or large appliance, is likely to take a hit. The new rate will also increase monthly payments and costs for any consumer already paying interest on credit card debt.
“Consumers should focus on building emergency savings and paying down debt,” said Greg McBride, chief financial analyst at Bankrate.com. “Even if this proves to be the Fed’s last rate hike, interest rates are still high and will stay that way.”
What happens to credit cards?
Even before the Fed’s latest move, Borrow a credit card has reached the highest level since 1996, according to Bankrate.com.
The most recent data available showed that 46% of people took on debt from month to month, up from 39% a year ago. Credit card balances totaled $986 billion in the fourth quarter of 2022, according to the Federal Reserve, which is a record, although this amount is not adjusted for inflation.
For those who don’t qualify for low-rate credit cards because of poor credit scores, higher interest rates are already taking a toll on their balances.
How will the increase affect credit card rates?
The Fed does not directly determine how much interest you pay on credit card debt. But the Fed rate is the basis of the Bank’s base rate. In combination with other factors, such as your credit score, the base rate helps determine the annual percentage rate, or APR, on your credit card.
The latter increase is likely to increase your credit card annual interest rate by 0.25%. So if you have a rate of 20.9%, that’s the average according to Federal Reserve dataIt may go up to 21.15%.
If you do not have balance from month to month, APR is less important.
But suppose you have a credit balance of $4,000 and your interest rate is 20%. If you make a flat payment of just $110 per month, it will take you less than five years to pay off your credit card debt, and you’ll pay about $2,200 in interest.
If your APR increased by a percentage point, paying off your balance would take two months longer and cost an extra $215.
What if I had money to spare?
After years of paying savers low rates, some banks are finally here Offer better interest on deposits. Although the increments may seem small, compound interest does accumulate over the years.
Interest on savings accounts doesn’t always follow what the Federal Reserve does. But as rates continue to rise, so do some Banks have improved their terms For savers as well. Even if you only keep modest savings in your bank account, you can make bigger gains in the long run by finding an account with a better rate.
While the largest national banks have yet to significantly change their savings account rates (they average just 0.23%, according to Bankrate), some mid- and smaller banks have made changes more in line with the Fed’s moves.
Online banks in particular – which save money through the lack of real branches and associated expenses – now offer savings accounts with annual returns of 3% to 4%, or even higher, as well as 4% or higher in certificates. Deposit for one year (CD). Some promotional rates can be as low as 5%.
Will this affect home ownership?
last week, Reported Freddie Mac Mortgage Buyer The average interest rate on a standard 30-year mortgage rose to 6.43% from 6.39% in the previous week. A year ago, the average rate was lower: 5.10%. Higher rates can add hundreds of dollars a month to your mortgage payments.
Rates for 30-year mortgages typically track movements in the 10-year Treasury yield. Prices can also be affected by investors’ expectations of future inflation, global demand for US Treasuries, and what the Federal Reserve is doing.
Most mortgages last for decades so if you already have one, you won’t be affected. But if you’re looking to buy and are already paying more for food, gas, and other necessities, a high mortgage rate may put home ownership out of reach.
What if I want to buy a car?
With computer chips and other parts in short supply, automakers are producing more cars. Many of them even lower prices or offer limited discounts. But rising loan rates and falling used-car trade-in values wiped out much of the savings in monthly payments.
Since the Fed started raising interest rates in March 2022, the average rate for new auto loans has jumped from 4.5% to 7%, according to Edmunds data. Used car loans decreased slightly, to 11.1%. The average loan term is about 70 months — roughly six years — for new and used vehicles.
Largely because of the price increase, Edmonds says, the average monthly payment for both new and used vehicles has gone up since March 2022. Edmonds says the average new car payment goes from $72 to $729. For used cars, the $20 per month payment rose to $546.
Joseph Yoon, a consumer insights analyst at Edmonds, said higher rates will keep people out of the market who have the ability to wait for better terms.
“But as inventory levels improve, it’s only a matter of time before discounts and incentives start to come back into the equation,” Yoon said, attracting more buyers.
Average new car prices are down from the end of last year to $47,749. But it is still higher than it was a year ago. The average used car price is down 7% from last May’s peak, to $28,729, but Prices are going up.
Financing a new car now costs $8,655 in interest. Analysts say that’s enough to chase many out of the auto market.
Any increase in the federal interest rate will usually be passed on to auto borrowers, though it will be slightly offset by manufacturer-subsidised rates.
What about my job?
The country’s employers continued to hire in March, Adding 236,000 health jobs. The unemployment rate fell to 3.5%, just above a 53-year low of 3.4% in January. At the same time, a report from the Labor Department indicated a slowdown, with wage growth also slowing.
Some economists argue that layoffs can help slow rising prices, and that a tight labor market is fueling wage growth and higher inflation.
economists expect The unemployment rate is on the rise to 3.6% in April, up slightly from January’s half-century low of 3.4%.
Will this affect student loans?
Borrowers taking out new private student loans should be prepared to pay more as rates increase. The current range for federal loans is between about 5% and 7.5%.
so he said, Payments on federal student loans Pending without interest until summer 2023 as part of an emergency measure put in place early in the pandemic. President Joe Biden has also announced some loan forgiveness, of up to $10,000 for most borrowers, and up to $20,000 for Pell Grant recipients — a policy It is now being challenged in the courts.
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AP business writers Christopher Rugaber in Washington, Tom Kreischer in Detroit, and Damien Trois and Ken Sweet in New York contributed to this report.
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