The Federal Reserve again turned to its most potent weapon to tame inflation on Wednesday, with the central bank raising rates for the sixth time in 2022. That means the cost of borrowing will continue to rise for investors. consumers and businesses, an economic pinch that could have had a major impact on your finances.
The Fed said it was raising its benchmark interest rate by 0.75 percentage point Wednesday, marking its fourth consecutive rise of this size this year.
Earlier in 2022, the central bank raised rates by smaller amounts – 0.25 and 0.5 percentage points – but with inflation remaining stubbornly sticky, the Fed is looking to bigger hikes to rein in runaway prices . The impact on Americans has been widely felt, especially at a time when inflation remains high. Mortgages exceeded 7% for the first time in two decades as credit card rates rise sharply.
“Unsurprisingly, it’s much more expensive to borrow than it was six months ago, and certainly a year ago,” Matt Schulz, chief credit analyst at LendingTree, told CBS MoneyWatch. “When you combine that with apparently everything becomes more expensive on a daily or weekly basis, it’s been a really tough year for consumers.”
It can only get harder, experts say.
Here’s what to expect after the Federal Reserve’s latest rate hike.
What is the Fed rate hike?
The central bank raised its key rate by 0.75 percentage points, bringing the Fed’s target range to 3.75% to 4%.
This increase was widely expected by economists – but the bigger question is what the Fed will signal on its path to hike rates in December and beyond, according to US economist Nancy Vanden Houten, lead Oxford. Economics, in a research note published before the ruling.
“Some Fed officials have suggested that a slower pace of rate hikes is on the horizon,” she noted.
The stock market jumped after the Fed’s statement on Wednesday, which hinted that future increases could be lower than the last set of increases by 0.75 percentage points.
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” , the Fed said in its statement. Wednesday statement.
How much are rate hikes costing you?
Every 0.25 percentage point increase in the Fed’s benchmark interest rate translates to an additional $25 a year in interest on $10,000 of debt.
That means Wednesday’s 0.75 percentage point hike will add an additional $75 in interest for every $10,000 in debt.
The Fed’s five hikes so far in 2022 have raised rates by a combined 3 percentage points, meaning consumers are now paying an additional $300 in interest on every $10,000 of debt. With Wednesday’s further rate hike, the Fed’s benchmark rate means consumers are paying $375 more for every $10,000 of debt.
Credit cards: highest rate in years
This will result in a significant impact on consumers who have balances on their credit cards.
Already, credit card rates have jumped in response to Fed rate hikes throughout 2022, with the average credit card rate hitting 22.21% in October, according to data from LendingTree. That’s the highest since LendingTree started tracking rates in 2018, Schulz said.
“Most everyone who has a credit card in this country will see their current card rate increase within a month or two after this happens,” he noted.
This won’t affect people who pay off their credit card balance each month, but those who have a balance will see higher interest charged to their accounts. And with inflation still high, more Americans are accumulate credit card debt to stay afloat.
About 6 in 10 credit card holders have had balances on their cards for at least a year, up from 1 in 10 in 2021, according at CreditCards.com.
“We’ve seen card debt rise quite rapidly recently, and that’s to be expected because so many people have had to rely more on their credit cards to pay for gas, groceries or central living costs. “, noted Schulz.
I have credit card debt. What can I do?
There are a few options available for people who have credit card debt and face higher interest from their card issuers, Schulz said.
The best option is to find a zero percent balance transfer card, which is still widely available. However, these cards – which allow you to transfer your balance from one card that charges interest to another that charges 0% during an introductory period – are generally only available to people with good credit scores. around 680 or more, Schulz said.
These zero percent offers typically charge a balance transfer fee of around 3%, but they also provide leeway during the introductory period of 15 months or more to pay off debt.
Consumers can also call their current credit card companies and ask for a lower rate, a request that has a surprisingly high success rate, Schulz said.
“We did a study earlier this year that showed about 70% of people who asked for a lower APR on their card got one, but too few people ask for it,” he noted.
How will another hike affect mortgage rates?
Mortgage rates have jumped this year alongside Fed rate hikes, with the typical 30-year loan outpacing 7% last month — more than double the rate available at the start of 2022.
This translates into very real costs for homebuyers. Take a home that sells for the US median price of $384,800 and is purchased with a 20% down payment. At the current mortgage rate of 7.16%, a homebuyer would pay about $750 more per month than with a loan at 3.2%, the rate earlier this year.
Rates may be even higher with Wednesday’s increase.
Already, soaring mortgage rates have quickly cooled the housing market – and economists predict it could be more choppy. House prices could fall by up to 20% next year as mortgage rates continue to climb and the housing market normalizes following the pandemic, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Car loans
Loans for cars are also getting more expensive, even as car prices drop, according to car-buying app CoPilot.
The average used car loan rate rose 1.2 percentage points from March to October, CoPilot said. That means the average payment for a used car is around $564 a month, up from $546 in March, or $1,300 more over the life of the loan. That offsets much of the benefit from lower prices, the company said.
And the average rate for a 60-month loan for a new car jumped to 5.6% at the end of October from 4.9% in August, according to Bankrate.
Savings accounts, CDs
There’s a benefit to another Fed hike: higher rates for savings accounts and certificates of deposit.
The rates for these accounts have risen sharply this year, even though they are behind set by the Federal Reserve – as well as increases seen in other interest-based products, such as mortgage rates and credit card rates.
The national average interest rate for savings accounts is 0.16%, according to Bankrate, although online savings banks offer better deals, with rates above 3% or more. Meanwhile, some CDs offer rates at 4% or more.
It’s certainly better than keeping cash, but it’s still well below the rate of inflation. With inflation above 8% in September, savers are essentially losing money by putting their money in a savings account that even earns 3%.
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