Americans have become accustomed to low interest rates on borrowing, making it cheap to take out a loan for a house, car, or other necessities. But now consumers will be paying more for all kinds of loans and credits this year as the Federal Reserve does. begins a series of rate hikes in 2022.
Fed officials announced Wednesday afternoon that they will raise the central bank’s short-term benchmark interest rate by 0.25%. It may not sound like much, but a quarter-point move in the federal funds rate is expected to be just the first of a few increases this year as the Fed normalizes monetary policy and tries to turn off the strongest inflation in decades.
The rise is also the first time since 2018 that the central bank has raised interest rates, indicating that the era of cheap money is coming to an end. The Fed’s justification behind the rate hike is to curb inflation, which last month hit a 40 years old maximum of 7.9%. By making it more expensive to borrow money to buy a house, car or other property, policymakers expect some consumers and businesses to decide to suspend purchases, which in turn slows the rise in prices due to lower demand. .
“As rates go up, mortgages and cars are harder to get,” Dick Pfister, CEO of Alphacore Wealth Advisory, told CBS MoneyWatch. “The benefit will be that if they can do it without causing a recession, they should bring down inflationary prices.”
The Fed is looking at economic indicators such as the labor market, with the unemployment rate close to pre-pandemic levels. However, while the economy is in solid form, there are risks with the change in the Fed’s strategy, as higher interest rates mean another cost that family budgets must absorb.
“It’s really a very thin needle to thread for the Federal Reserve,” Pfister said. “We’ve had this easy money mentality for so long, it’s going to be hard to get the economy out of this mentality.”
What will it cost you to raise rates?
Each 0.25% increase equates to an additional $ 25 per annum in interest on $ 10,000 in debt. So if the Fed raises interest rates by a total of 1.5% for six hikes this year, as many economists expect, consumers will pay an additional $ 150 annually for that debt.
This can increase rapidly, especially for borrowers looking to buy high-priced items such as houses or cars, both of which have witnessed sharp price rises during the pandemic due to low inventory and strong demand. Wall Street expects the Fed to raise interest rates at least sixfold in 2022, bringing the policy rate to between 1.5% and 1.75%, LPL financial strategists Lawrence Gillum said. Ryan Detrick.
This could add to the budget crisis that many consumers are feeling, experts say.
“Households face the prospect of navigating a path between the rising inflation scale and the Caribbean of rising borrowing costs,” said Matthew Sherwood, global economist at the Economist Intelligence Unit. in an email.
Credit cards, home value lines of credit
Credit card rates are likely to rise in line with the Fed’s move because card charges are based on pre-bank rates, which move at the same time as the Fed. Experts say you expect your credit card rate to increase over the next few billing cycles.
Other types of adjustable rate credit are also likely to have an impact, such as home equity lines of credit and adjustable rate mortgages, which are also based on the preferential rate. Car loans may also increase, although they may be more sensitive to buyer competition, which could silence the impact of the Fed’s rise.
Mortgages have already risen pending the Fed’s decision. The typical 30-year loan rate reached 3.85% in the week ending March 9, compared to 3.05% a year earlier, according to Freddie Mac.
However, mortgage rates do not usually rise in line with Fed rate hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to follow the 10-year Treasury rate, which in turn is influenced by a number of factors. These include investor expectations about future inflation and global demand for U.S. Treasury bonds.
Savings accounts, CD
One benefit for consumers could be the higher returns on your savings accounts and certificates of deposit, to some extent.
The problem is, even if your savings account starts paying more than the current average interest rate of 0.06%, inflation is much higher. In fact, you’re still eroding the value of your money by putting it into a savings account.
“Yes [savings account rates] it goes up to 1% and inflation stays close to 8%, you’re still a negative 7% in terms of real profitability, “Pfister said.” Unless rate hikes dominate inflation, you’ll still be other way round”.
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