- The Federal Reserve is expected to pause its rate hike campaign at the end of its two-day meeting next week.
- Consumers will continue to feel the effects of higher interest rates and persistent inflation.
- Here’s a breakdown of how the Fed is impacting your monthly spending and savings.
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Experts expect the Federal Reserve to temporarily suspend its aggressive rate hikes at next week’s meeting. But consumers may not see relief.
The central bank has hiked interest rates 10 times since last year – the fastest rate of tightening since the early 1980s – only to see inflation remain well above its 2% target.
“We’re living in uncharted territory,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion. “The combination of rising interest rates and elevated inflation, while not uncommon from a historical perspective, is an unfamiliar experience for many consumers.”
“A break will not make things better,” he added.
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Although the Fed’s rate-hiking cycle has started to cool inflation, higher prices have caused real wages to fall. As a result, household budgets are being slashed and more people are going into debt just as borrowing rates are at record highs.
Even with a pause: “Interest rates are at their highest in years, the cost of borrowing has risen dramatically and that’s not going to change,” said Greg McBride, chief financial analyst at Bankrate.com.
Here’s a breakdown of how the benchmark interest rate has already impacted the rates consumers pay:
The Federal Funds Rate, set by the US Federal Reserve, is the rate at which banks lend and borrow money from each other overnight. While that’s not the rate consumers are paying, the Fed’s moves are still impacting the lending and savings rates they see every day.
First of all, most credit cards have a variable interest rate a direct link to the Fed’s interest rate.
After previous rate hikes, the average credit card rate is now more than 20% — an all-time high, while balances are higher and nearly half of credit card holders are struggling month-to-month in debt, according to a Bankrate report.
Although mortgage rates for 15- and 30-year mortgages are fixed and linked to Treasury yields and the economy, anyone buying a new home has suffered significant losses in purchasing power, in part due to inflation and Fed policy actions .
The average interest rate on a 30-year fixed-rate mortgage is currently 6.9%, according to Bankrate, up from 5.27% a year ago and only slightly below October’s peak of 7.12%.
Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are linked to the prime rate. As the policy rate went up, so did the policy rate, and these rates followed suit.
According to Bankrate, the average interest rate on a HELOC is currently up to 8.3%, its highest in 22 years. “While this is typically viewed as a cheap way to borrow, that’s no longer the case,” McBride said.
Even when car loans are frozen, the payments continue to increase as the price of all cars increases and interest rates on new loans increase at the same time.
According to Bankrate, the average interest rate on a five-year new car loan is currently 6.87%, the highest since 2010.
Research shows that keeping up with higher costs has become a challenge as more borrowers default on their monthly loan payments.
Federal student loan rates are also fixed, so most borrowers are not directly affected by the Fed’s actions. But starting in July, interest rates for undergraduate students taking out new federal direct student loans will rise to 5.50% — from 4.99% in the 2022-23 academic year and 3.73% in the 2021-22 academic year.
Until the end of the payment pause, which the US Department of Education expects in the fall, everyone with existing federal debt in education will benefit from interest rates of 0% for the time being.
Personal student loans typically have a variable interest rate tied to the Libor, prime rate, or Treasury bill rate — and that means these borrowers are already paying more interest. However, how much more varies by benchmark.
While the Fed has no direct influence on deposit rates, yields tend to correlate with changes in the federal funds target rate. Savings account rates at some of the largest retail banks, which have been close to bottoming out for most of the Covid pandemic, are now averaging as much as 0.4%.
Thanks in part to lower overheads, interest rates for the highest-yielding online savings accounts are now over 5%, the highest since the 2008 financial crisis, according to Bankrate.
However, if the Fed skips a rate hike at its June meeting, increases in deposit rates are likely to slow, according to Ken Tumin, founder of DepositAccounts.com.
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