How sharp increases in federal interest rates affect your finances

New York (AFP) – Mortgage rates jumpedHome sales fell and the prices of credit cards and auto loans rose. However, the savings rates are more attractive.

like the Federal Reserve Rapidly increasing interest ratesMany economists say they fear it Recession is inevitable In the coming months – and with it, job losses that may already be hard for families The worst hit by inflation.

Even before the Federal Reserve acts again on Wednesday to raise its key short-term interest rate sharply – a third straight three-quarter point increase is likely to be announced – previous interest rates are now being raised. It is felt by families at all income levels.

The Fed’s latest move is expected to raise the benchmark interest rate to a range of 3% to 3.25%, the highest level in 14 years. Steady increases in their rates make borrowing increasingly expensive for consumers and businesses – for homes, cars and other purchases. More highs are almost certain to come. Federal Reserve officials are expected on Wednesday to indicate that the benchmark interest rate could reach 4.5% by early next year.

Here’s what you need to know:

How does raising interest rates reduce inflation?

If one of the definitions of inflation is Too much money chasing too few goodsThen, by making it more expensive to borrow money, the Fed hopes to reduce the amount of money in circulation, eventually reducing rates.

Who are the most affected consumers?

Anyone who borrows money to make a large purchase, such as a home, a car or a large appliance, will be hurt, said Scott Hoyt, an analyst at Moody’s Analytics.

“The new rate dramatically increases your monthly payments and your cost,” he said. “It also affects consumers who have a lot of credit card debt – which will hit immediately.”

However, Hoyt noted that household debt payments, as a proportion of income, are still relatively low, although they have risen recently. So, even with steadily rising borrowing rates, many households may not feel a much heavier debt burden right away.

“I’m not sure interest rates are number one in the minds of most consumers right now,” Hoyt said. More worried about groceries And the What happens in the gas pump. Prices can be a tough thing for consumers to get their minds around.”

How will this affect credit card rates?

Even before the Fed’s decision on Wednesday, credit card borrowing rates had reached their highest level since 1996, according to Bankrate.com, and those are likely to continue to rise.

And as inflation rages, there are signs that Americans are increasingly relying on credit cards to help sustain their spending. Total credit card balances exceeded $900 billion, according to the Federal Reserve, a record figure, although that amount was not adjusted for inflation.

John Lear, chief economist at Morning Consult, an investigative research firm, said polls indicate that more Americans are spending to cut back on the savings they’ve accumulated during the pandemic and are using credit instead. Ultimately, higher rates may make it more difficult for those families to repay their debts.

Those who don’t qualify for low-rate credit cards because of poor credit scores are already paying much higher interest on their balances, and will continue to do so.

with higher prices, Zero percent loans marketed as “buy now, pay later” It has also become popular with consumers. However, the long-term loans in excess of four payments offered by these companies are subject to the same increased borrowing rates as credit cards.

For people with lines of credit for home equity or other variable-interest debt, rates will rise by roughly the same amount as the Federal Reserve increase, usually within one or two billing cycles. That’s because these rates are based in part on the banks’ base rate, which follows the Fed rate.

What if I want to buy a car?

Auto loans are at their highest level since 2012, according to Bankrate.com’s Greg McBride. New auto loan rates are likely to rise by an amount close to the rate increase by the Federal Reserve. That could drive some low-income buyers out of the new car market, said Jessica Caldwell, CEO of Edmunds.com.

Caldwell added that the entire increase does not pass on to consumers; Some automakers subsidize prices to attract buyers. Bankrate.com says the average new 60-month car loan averaged more than 5% last week, up from 3.86% in January. A 48-month used car loan was 5.6%, up from 4.4% in January.

According to Caldwell, many low-income buyers have already been excluded from the new car market. Automakers have been able to get top dollar for their cars because demand is high and supply is low. For more than a year, the industry has been grappling with a shortage of computer chips that has slowed factories around the world.

How are savers affected?

Increasing returns on higher-yield savings accounts and certificates of deposit has put them at levels not seen since 2009, meaning families may want to increase savings where possible. You can now earn more on bonds and other fixed income investments.

Although savings accounts, CDs, and money market accounts do not usually follow the Fed’s changes, online banks and other banks that offer high-yield savings accounts can be exceptions. These institutions usually compete aggressively for depositors. (Problem: it sometimes requires remarkably high sediment).

In general, banks tend to take advantage of a higher rate environment to increase their profits by charging borrowers higher rates, without necessarily offering better rates to savers.

Will this affect rents? home ownership?

Last week, the average fixed-rate mortgage rate reached 6%, its highest level in 14 years, meaning home loan interest rates are twice as high as they were a year ago.

Mortgage rates don’t always move perfectly in tandem with the Fed’s increase, and instead track the expected yield on 10-year Treasuries. The yield on the 10-year Treasury bond reached nearly 3.6%, the highest level since 2011.

Demand for rents is up 11% from last year, said Daryl Fairweather, an economist at brokerage Redfin. But price growth slowed downSome tenants are moving to more affordable areas.

Would it be easier to find a home if I was still looking to buy?

If you are financially able to go ahead with a home purchase, you likely have more options than at any time in the past year. Both sales New and existing homes have been steadily declining for months.

How did the rate of spikes affect CRYPTO?

Cryptocurrencies like Bitcoin have fallen in value since the Federal Reserve started raising interest rates. As well as many previously high-value technology stocks. Bitcoin has fallen from a peak of around $68,000 to below $20,000.

Higher rates mean that safe assets such as Treasury bonds are becoming more attractive to investors due to their higher yields. This, in turn, makes riskier assets such as technology stocks and cryptocurrencies less attractive.

However, bitcoin still has problems separate from economic policy. Two major crypto companies have failed, Shake the confidence of investors in the field of cryptocurrency.

What drives higher prices?

The short answer: inflation. over the past year, Inflation recorded a painful 8.3%. So-called core prices, which exclude food and energy, also rose faster than expected.

Fed Chairman Jerome Powell warned last month that “our responsibility to achieve price stability is unconditional” — a remark widely interpreted to mean the Fed will fight inflation by raising interest rates even if it means deep job losses or a recession. .

The goal is to slow down consumer spending, thereby reducing demand for homes, cars, and other goods and services, and ultimately to calm the economy and lower prices.

Powell acknowledged that aggressive rate hikes would “bring some pain”.

What about my job?

Some economists argue that large-scale layoffs will be necessary to slow price increases. One reason is that tight job market It fuels wage growth and rising inflation. In August, the economy gained 315,000 jobs. Almost two vacancies are advertised for every unemployed worker.

“Employment opportunities continue to outpace job postings, which indicates that employers are still struggling to fill vacancies,” noted Odita Koshi, an economist at First American.

As a result, some argue that higher unemployment may ease wage pressures and ease inflation. Research published earlier this month by the Brookings Institution said unemployment may have to rise to 7.5% to bring inflation down to the Fed’s 2% target.

Will this affect student loans?

Borrowers taking out new private student loans should prepare to pay more as rates increase. The current range for federal loans is between about 5% and 7.5%.

However, payments on interest-free federal student loans have been suspended until December 31 as part of an emergency measure put in place early in the pandemic. As President Joe Biden Advertise some loan forgivenessup to $10,000 for most borrowers, and up to $20,000 for Bill Grant recipients.

Is there a chance of undoing the rate hikes?

Stock prices rose in August on hopes that the Fed would reverse course. But it seems increasingly unlikely that rates will fall any time soon. Economists expect Federal Reserve officials to expect the key rate to reach 4% by the end of this year. It is also likely to indicate additional increases in 2023, up to 4.5%.

Will there be a recession?

Short-term rates at these levels It will make a recession more likely By increasing the cost of mortgages, auto loans and business loans. While the Fed hopes that higher borrowing costs will slow growth by cooling the labor market and capping wage growth, the risk is that the Fed could weaken the economy, causing a recession that could result in significant job losses.

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Associated Press business writers Christopher Rogaber in Washington, Tom Krecher in Detroit, Damien Trois and Ken Sweet in New York contributed to this report.

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The Associated Press receives support from the Charles Schwab Foundation for educational and interpretive reporting to improve financial literacy. The independent foundation is separate from the Charles Schwab & Co. Foundation. The AP is solely responsible for its press.”

Cora Lewis, Associated Press