Here’s how a higher Fed rate could affect your finances

WASHINGTON (AP) — Record mortgages are long gone. Credit card rates are likely to go up. The same will apply to the cost of a car loan. Savers could finally see a noticeable return.

The unusually large three-quarter point hike in its benchmark short-term rate announced by the Federal Reserve on Wednesday won’t, on its own, have a huge effect on most Americans’ finances. But combined with past rate hikes and other big increases to come, economists and investors are predicting the fastest pace of rate hikes since 1989.

The result is rising borrowing costs as the Fed battles the most painfully high inflation in four decades and ends a decades-long period of historically low rates.


Chairman Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services and slowing inflation.

Yet the risks are high. With inflation likely to remain elevated, the Fed may need to push borrowing costs even higher than it currently expects. A series of higher rates could tip the US economy into recession. This would mean rising unemployment, increased layoffs and continued pressure on stock prices.

How will this affect your finances? These are some of the most frequently asked questions about the impacts of rising rates.

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I AM PLANNING TO BUY A HOUSE. WILL MORTGAGE RATES CONTINUE TO RISE?

Home loan rates have skyrocketed over the past few months, mostly in anticipation of the Fed’s actions, and will likely continue to rise.

Mortgage rates don’t necessarily go up at the same time as Fed rate hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to follow the yield of the 10-year treasury bill, which, in turn, is influenced by various factors. These include investor expectations for future inflation and global demand for US Treasuries.

For now, however, accelerating inflation and strong US economic growth are pushing the 10-year Treasury rate up sharply. As a result, the national average for a 30-year fixed mortgage has risen from 3% at the start of the year to well over 5% now.

The rise in mortgage rates partly reflects expectations that the Fed will continue to raise its key rate. But its next rises are probably not yet fully priced in. If the Fed raises its key rate even higher, as expected, the 10-year Treasury yield will also rise a lot and mortgages will become more expensive.

WILL IT STILL BE DIFFICULT TO FIND A HOUSE?

If you’re looking to buy a home and you’re frustrated with the lack of available homes, which has sparked bidding wars and sky-high prices, it might soon get a little easier.

Economists say higher mortgage rates will discourage some potential buyers. And average home prices, which have been climbing at an annual rate of about 20%, could at least rise at a slower pace.

Sales of existing homes have fallen for six straight months. Sales of new homes also fell. These trends slightly increase the supply of available properties.

I NEED A NEW CAR. SHOULD I BUY ONE NOW?

Fed rate hikes can make car loans more expensive. But other factors also affect these rates, including competition between car manufacturers which can sometimes lower borrowing costs.

Rates for buyers with lower credit ratings are most likely to rise due to Fed hikes. Since the prices of used vehicles increase on average, the monthly payments will also increase.

WHAT WILL HAPPEN TO MY CREDIT CARD?

For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise by roughly the same amount as the Fed hike, typically within one or two billing cycles. That’s because those rates are based in part on the banks’ prime rate, which moves in tandem with the Fed.

Those who don’t qualify for low-rate credit cards may end up paying higher interest on their balance. The rates on their cards would increase as the prime rate does.

Fed rate hikes have already sent credit card lending rates above 20% for the first time in at least four years, according to LendingTree, which has been tracking data since 2018.

HOW WILL THIS AFFECT MY SAVINGS?

You may earn a little more, but probably not much. And it depends on where your savings, if you have any, are parked.

Savings, certificates of deposit and money market accounts generally do not follow Fed changes. Instead, banks tend to take advantage of a higher rate environment to try and boost their profits. They do this by charging higher rates to borrowers, without necessarily offering lower rates to savers.

This is especially true for large banks today. They have been inundated with savings thanks to government financial aid and the spending cuts of many wealthier Americans during the pandemic. They won’t need to raise savings rates to attract more deposits or CD buyers.

But online banks and others with high-yield savings accounts might be an exception. These accounts are known for their aggressive competition for depositors. The only problem is that they usually require large deposits.

HOW WILL HIKING INFLUENCE CRYPTO?

Cryptocurrencies like bitcoin might become a little less appealing to many investors.

While bitcoin prices were mostly unchanged after the Fed’s announcement, crypto prices had fallen in the days leading up to the central bank’s decision. They fell by a third in seven days.

Higher interest rates mean that safe assets like bonds and treasury bills become more attractive to investors as their yields are now higher. This, in turn, makes risky assets like tech stocks and cryptocurrencies less attractive.

That said, bitcoin suffers from its own issues that are separate from economic policy. Two major crypto companies failed in the span of a month. The shaken confidence of crypto investors is not helped by the fact that the safest place you can park money now – bonds – seems like a safer move.

WILL MY STUDENT LOAN PAYMENT INCREASE?

Currently, payments on federal student loans are suspended until August 31 as part of an emergency measure put in place during the pandemic. Inflation means loan holders have less income available to make payments, but a sluggish economy that reduces inflation could bring some relief in the fall.

The government may choose to extend the emergency measure by postponing payments until late summer, depending on the state of the economy. President Joe Biden is also considering some form of loan forgiveness. For those taking out new private student loans, be prepared to pay more. Rates vary by lender, but are expected to increase.

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Associated Press reporters Ken Sweet, Adriana Morga and Cora Lewis contributed to this report. Morga and Lewis cover financial literacy for The Associated Press. The Associated Press receives support from the Charles Schwab Foundation for educational and explanatory reports aimed at improving financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.

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