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Here's what the Fed's interest rate hike means for you
The Federal Reserve raised the target federal funds ratefor the eighth time in a row on Wednesday, in its continued effort to tame persistent inflation.
At its latest meeting, the central bank approved a more modest 0.25 percentage point increase after recent signs that inflationary pressures have started to cool.
"The easing of inflation pressures is evident, but this doesn't mean the Federal Reserve's job is done," said Greg McBride, chief financial analyst at Bankrate.com. "There is still a long way to go to get to 2% inflation."
What the federal funds rate means to you
The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that's not the rate consumers pay, the Fed's moves do affect the borrowing and saving rates consumers see every day.
This rate hike will correspond with a rise in the prime rate and immediatelysend financing costs higherfor many forms of consumer borrowing — putting more pressure on households already under financial strain.
"Inflation has shredded household budgets and, in many cases, households have had to lean against credit cards to bridge the gap," McBride said.
On the flip side, "with rates still rising and inflation now declining, it is the best of both worlds for savers," he added.
How higher interest rates can affect your money
1. Your credit card rate will rise
Since mostcredit cardshave a variable rate, there's a direct connection to the Fed's benchmark.As the federal funds rate rises, the prime rate does, as well, and your credit card rate follows suit within one or two billing cycles.
"Credit card interest rates are already as high as they've been in decades," said Matt Schulz, chief credit analyst at LendingTree. "While the Fed is taking its foot off the gas a bit when it comes to raising rates, credit card APRs almost certainly will keep climbing for at least the next few months, so it is important that cardholders continue to focus on knocking down their debt."
Credit card annual percentage ratesare now near 20%, on average, up from 16.3% a year ago, according to Bankrate. At the same time, more cardholders carry debt from month to month while paying sky-high interest charges — "that's a bad combination," McBride said.
At more than 19%, if you made minimum payments toward the average credit card balance — which is $5,474, according to TransUnion— it would take you almost 17 years to pay off the debt and cost you more than $7,528 in interest, Bankrate calculated.
Altogether, this rate hike will cost credit card users at least an additional $1.6 billion in interest charges in 2023, according to a separate analysis by WalletHub.
"A 0% balance transfer credit card remains one of the best weapons Americans have in the battle against credit card debt," Schulz advised.
Otherwise, consumers should consolidate and pay off high-interest credit cards with a lower-interestpersonal loan, he said. "The rates on new personal loan offers have climbed recently as well, but if you have good credit, you may be able to find options that feature lower rates that what you currently have on your credit card."
2. Mortgage rates will stay higher
Rates on 15-year and 30-year mortgages are fixed and tied to Treasury yields and the economy. As economic growth has slowed, these rates have started to come down but are still at a 10-year high, according to Jacob Channel, senior economist at LendingTree.
The average interest rate for a 30-year fixed-rate mortgage is now around 6.4% — up almost 3 full percentage points from 3.55% a year ago.
"Relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many," Channel said.
This rate hike has increased the cost of new mortgages by around 10 basis points, which translates to roughly $9,360 over the lifetime of a 30-year loan, assuming the average home loan of $401,300, WalletHub found. A basis point is equal to 0.01 of a percentage point.
"We're still a ways away from the housing market being truly affordable, even if it has recently become a bit less expensive," Channel said.
Other home loans are more closely tied to the Fed's actions. Adjustable-rate mortgages, or ARMs,andhome equity lines of credit, or HELOCs,are pegged to the prime rate. Most ARMs adjust once a year, but a HELOC adjusts right away.Already, the average rate for a HELOC is up to 7.65% from 4.11% a year ago.
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3. Auto loans will get more expensive
Even thoughauto loansare fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning tobuy a car, you'll shell out more in the months ahead.
The average interest rate on a five-year new car loan is currently 6.18%, up from 3.96% last year.
The Fed's latest move could push up the average interest rate even higher, althoughconsumers with higher credit scoresmay be able to secure better loan terms or look to some used car models for better deals.
Paying an annual percentage rate of 6% instead of 4% would cost consumers $2,672 more in interest over the course of a $40,000, 72-month car loan, according to data from Edmunds.
"The ever-increasing costs of financing remain a challenge," said Ivan Drury, Edmunds' director of insights.
4. Some student loans will get pricier
Federal student loan ratesare also fixed, so most borrowers won't be affected immediately. But if you are about to borrow money for college, the interest rate on federal student loans taken out for the 2022-23 academic year already rose to 4.99%, up from 3.73% last year and any loans disbursed after July 1 will likely be even higher.
If you have a private loan, those loans may be fixed or have a variable rate tied to theLibor, prime or T-bill rates, which means that as the central bank raises rates, borrowers will likely pay more in interest, although how much more will vary by the benchmark.
Currently, average private student loan fixed rates can range from just under 4% to almost 15%, according to Bankrate.As with auto loans, they also vary widely based onyour credit score.
For now, anyone with existing federal education debt will benefit from rates at 0% until the payment pause ends, which the Education Department expects to happensometime this year.
What savers should know about higher interest rates
The good news is that interest rates on savings accounts are finally higher after the recent run of rate hikes.
While the Fed has nodirect influenceon deposit rates, they tend to be correlated to changes in the target federal funds rate, andthe savings account rates at some of the largest retail banks, whichhave been near rock bottomduring most ofthe Covid pandemic, are currently up to 0.33%, on average.
Also, thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 4.35%, much higher than the average rate from a traditional, brick-and-mortar bank.
Rates on one-year certificates of deposit at online banks are even higher, now around 4.75%, according to DepositAccounts.com.
As the Fed continues its rate-hiking cycle, these yields will continue to rise, as well. However, you have to shop around to take advantage of them, according to Yiming Ma, an assistant finance professor at Columbia University Business School.
"If you haven't already, it's really important to benefit from the high interest environment by getting a higher return," she said.
Still, because the inflation rate is now higher than all of these rates, any money in savings loses purchasing power over time.
FAQs
What does the Fed's rate hike mean for my money? ›
The Fed's rate hikes will increase interest costs for new auto loans, which are currently at a 6.18% rate for a five-year new car loan, up from 3.96% at the beginning of 2022. Car shoppers with higher credit scores may be able to get better loan terms.
What does a 25 bps rate hike mean? ›If the Federal Reserve Board raises the target interest rate by 25 basis points, it means that rates have risen by 0.25% percentage points.
What happens when Federal Reserve raises interest rates? ›The fed funds rate impacts how much commercial banks charge each other for short-term loans. A higher rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money.
What the Fed rate hike means for your savings credit cards and loans? ›Borrowing Money Is More Expensive. When the Fed increases interest rates, it becomes more expensive to borrow money. It means higher rates for credit cards, auto loans, and any industry that relies on financing.
What assets do well with rising interest rates? ›- Banks and other financial institutions. As rates rise, banks can charge higher rates for their mortgages, while moving up the price they pay for deposits much less. ...
- Value stocks. ...
- Dividend stocks. ...
- The S&P 500 index. ...
- Short-term government bonds.
Basic economic theory attests that higher interest rates lead to a decrease in the money supply and appreciation of the dollar. At the same time, lending and credit markets contract. Global credit markets follow the movements of Treasury Bonds. And, as interest rates increase, the cost of credit does, too.
How many dollars is 25 basis points? ›| Basis Points | Percentage | Decimal |
|---|---|---|
| 5 | 0.05% | 0.0005 |
| 10 | 0.10% | 0.0010 |
| 15 | 0.15% | 0.0015 |
| 25 | 0.25% | 0.0025 |
A basis point is one-hundredth of one percent (0.01%). For example, the difference between a 4.00% interest rate and a 4.25% rate is 25 basis points. One hundred basis points equals one full percentage point; that is, a 1.00% interest rate is comprised of 100 basis points.
What does interest rate hike mean for buyers? ›High interest rates cost home buyers more interest in the long run. And a mortgage lender will lend you less because higher interest rates increase your debt-to-income ratio. So that means you'll have less buying power when you're shopping for a house.
Are rate hikes good for savers? ›With increasing rates, loans are generally more costly, but savings accounts can earn higher yields. For those who have little or no debt and can contribute to savings, a Fed rate increase could be a financial opportunity.
Who benefits from Fed interest rate hike? ›
1. Higher returns for savers. If you're a saver, low interest rates have brought about the financial equivalent of a long drought. Historically, the average rates on savings products, including CD rates, had been on a downward trend.
Do interest rate hikes hurt banks? ›A higher fed funds rate means more expensive borrowing costs, which can reduce demand among banks and other financial institutions to borrow money. The banks pass on these higher borrowing costs by raising the rates they charge for consumer loans.
How will Fed rate hike affect mortgages? ›When the Federal Reserve raises the benchmark interest rate, it indirectly pushes mortgage rates up. Mortgage rates have more than doubled since the beginning of 2022 and surpassed the 7% mark in October. Higher mortgage rates make buying a home more expensive.
What will the Fed interest rate be in 2023? ›The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent, effective February 2, 2023.
Is the interest rate hike good? ›But while rate hikes aren't a great thing for borrowers, they can be a good thing for savers. That's because rate hikes tend to lead to higher interest rates in savings accounts, as well as higher CD rates.
What are the disadvantages of high interest rates? ›- The downside of higher interest rates is that they tend to hurt most other types of investments, particularly stocks. ...
- But slower economic growth usually leads to challenging market conditions. ...
- Interest rate changes can affect your debt as well.
How long will high interest rates last? Is there a chance they will go down in the next year or two? The truth is we don't know for sure. However, many industry experts believe within 18 to 24 months rates will be back to a more 'palatable' level.
How Much Longer Will Fed raise interest rates? ›Markets expect the Fed to continue to raise rates early in 2023, due to inflation concerns. Recent data has shown that U.S. inflation is declining. After topping a 9% annual rate in June, November CPI showed inflation at 7%.
Who benefits the most from inflation? ›- Collectors.
- Borrowers With Existing Fixed-Rate Loans.
- The Energy Sector.
- The Food and Agriculture Industry.
- Commodities Investors.
- Banks and Mortgage Lenders.
- Landowners and Real Estate Investors.
- Invest in Banks and Brokerage Firms. Banks and brokerage firms earn money from interest. ...
- Invest in Cash-Rich Companies. ...
- Lock in Low Rates. ...
- Buy With Financing. ...
- Invest in Technology, Health Care. ...
- Embrace Short-Term or Floating Rate Bonds. ...
- Invest in Payroll Processing Companies. ...
- Sell Assets.
Where can I put my money to gain the most interest? ›
- Switch to a high-interest savings account. ...
- Consider a rewards checking account. ...
- Take advantage of bank bonuses. ...
- Try a money market account. ...
- Check with your local credit union.
Interest rate hikes create tighter financial conditions during which credit spreads often fall, equity prices and stocks drop in value, and the strength of the U.S. dollar increases. Such financial conditions can hurt the economies of other countries, as their currencies may be weaker than the dollar.
Do rising interest rates weaken the dollar? ›Generally, higher interest rates increase the value of a country's currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency.
Does the dollar get stronger when the Fed raises rates? ›When the Federal Reserve increases the federal funds rate, it typically increases interest rates throughout the economy, which tends to make the dollar stronger. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.
How do you calculate 25 basis points? ›Then, To convert the basis points into percentages we have to divide the basis points by 100. Therefore, 25 basis points denote 0.25%.
How do you convert basis points to dollars? ›50 basis points is equivalent to 0.5%, as 1 basis point is one hundredth of 1%, or 0.01%. For example, if a stock option worth $60000 has increased by 50 basis points, its value has increased by $300, and is now worth $60300.
How many basis points is a penny? ›Imagine 1 penny is 1 basis point. 100 pennies = 100 basis points. 100 pennies = 1 full point, or 1%. 1% = 100 basis points.
What does basis points mean in inflation? ›How Much Is A Basis Point? A basis point is one-hundredth of a percentage point. For instance, one basis point equals 0.01%, or 0.0001. One hundred basis points equal 1%.
How much is 75 basis points in dollars? ›75 basis points mean 0.75%. By increasing the interest rates they charge for consumer loans, banks pass on these higher borrowing costs to borrowers.
How much is 50 basis points worth? ›Since 1 Basis Point is equal to 0.01 %, 50 Basis point is equal to 0.5 percent.
Should you buy a house when interest rates are rising? ›
Rising interest rates affect home affordability for buyers by increasing the monthly mortgage payment. Despite how it seems, there are benefits to buying when interest rates rise. Less buyer competition forces home sales prices down, opens up more choices for buyers and can reduce buyer risk.
Is it a good time to buy a house with interest rates going up? ›The Bottom Line
Rising interest rates tend to scare home buyers out of the market, but many experts suggest that the opposite should be true. For the right buyers, high interest and high inflation may make this the perfect time to buy a house.
Advantages Of Lower House Prices
If homes are more affordable because interest rates are high, buying a lower-priced home could work to your advantage in the long run if you think rates will eventually go down. Once mortgage rates drop, you may have the option to refinance into a new loan at the lower rate.
Do Banks Offer 7% Interest On Savings Accounts? 7% interest isn't something banks offer in the US, but one credit union, Landmark CU, pays 7.50% interest, though there are major requirements and stipulations.
How high will CD rates go in 2023? ›CD Interest Rates Forecast for 2023
If the Fed carries out three more interest rate hikes in 2023, Tumin predicts the highest rates for five-year CDs will sit around 4.00% to 4.50% by the end of the year.
How High Will CD Rates Go in 2022? Averages across CD terms among the dozens of banks we track weekly are already around 3.5% APY today. Those rates could reach the 4% range by the end of this year, says Cory Moore, certified financial planner and founder of Moore Financial Planning.
What will happen when interest rates go up? ›Your Credit Score May Fall. Higher interest rates can cause those with mortgage and credit card debt to struggle as payments rise, leading to missed payments and delinquent accounts. As a result, borrowers may see their credit scores fall when interest rates climb.
Is everybody worse off when interest rise? ›Explanation. No, when interest rates rise, not everyone suffers. people who need to borrow funds for any purpose are negatively because financing costs more; conversely, savers earn profit because they can earn greater interest rates on their savings.
Will interest rates go down in 2023? ›The mortgage interest rate forecast for February 2023 is for rates to continue to decline. As inflation shows signs of moderating, 30-year mortgage rates are inching closer to the 6% mark, dropping to 6.15% on Jan. 19th, 2023, according to the Freddie Mac Primary Market Mortgage Survey (PMMS).
Do interest rate hikes reduce inflation? ›“Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices,” says Gapen. So why might this cause a recession? In the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production, explains Gapen.
Will Fed rate hike affect savings rates? ›
For savers, banks offering top rates tend to pay more when the U.S. central bank hikes rates and less when it cuts them. The Fed raised the target for the federal funds rate by 25 basis points today, after raising the target seven times in 2022.
Is Fed rate hike good for stocks? ›“If interest rates move higher, stock investors become more reluctant to bid up stock prices because the value of future earnings looks less attractive versus bonds that pay more competitive yields today,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
Should you save when interest rates rise? ›Rising interest is good for savers but bad news for borrowers. If you have a savings account but also some form of debt, such as a loan, credit card or mortgage, you may actually end up worse off due to higher interest payments.
Will stock market crash when interest rates rise? ›When interest rates rise, stocks tend to fall in value because of lower future earnings. Higher inflation leads to higher interest rates, which do impact the stock market. Investors need to build a diversified portfolio to ride out declines in the stock market.
Will inflation go down in 2023? ›Demand for services is still on the rise, while the demand for goods continues to moderate. A December analysis by supply chain firm Flexport found the consumer preference for goods is holding steady. This period of inflation could end by the middle of 2023, Hogan estimates.