The Fed has raised interest rates the most since 2000. Here’s the impact on your wallet.
The Federal Reserve is turning to its most powerful weapon to fight the highest inflation in 40 years: rising interest rates. On Wednesday, the central bank announced that it wasits benchmark short-term interest rate of 0.5%, marking the largest increase since 2000.
The Fed’s goal is to reduce consumer and business demand for goods and services. By raising rates, it is thought, it will become more expensive to borrow money to buy a house, car or other needs, causing some people to delay purchases. Lower demand could help keep inflation in check, which has picked up tothe biggest increase since 1981.
This decision should not be a complete shock to consumers and businesses, given that the Fed has already raised interest rates.in March and reported more hikes to come. At the same time, Americans have grown accustomed to low interest rates for everything from buying a home to car loans. An increase of half a point, or 0.50%, could mean higher costs that could strain your budget.
“For the first time in 22 years, the Federal Reserve is on the verge of raising interest rates by more than a quarter of a percentage point,” Greg McBride, chief financial analyst at Bankrate, said in a statement. email before the Fed announcement. “It gives an idea of the steps households should take to stabilize their finances — paying down debt, especially expensive credit cards and other variable-rate debt, and boosting emergency savings.”
Certainly, even with the biggest rise in interest rates since 2000 – when the United States was in the middle of the dotcom bubble – rates remain historically low. With the boost, the federal funds rate will likely stay at 1%, down from 6.5% when the central bank last raised rates by the same amount in 2000, according to data compiled by Bankrate.
Here’s what the increase will mean for your wallet.
What will the price increase cost you?
Each 0.25% increase equals an additional $25 per year in interest for $10,000 of debt. Thus, an increase of 50 basis points will result in $50 of additional interest for every $10,000 of debt.
However, economists do not expect the Fed to stop raising rates after Wednesday’s announcement. Economists predict the Federal Reserve will lead another 50 basis point increase in June, with additional increases to follow later in 2022.
By the end of the year, the federal funds rate could reach 2% or more, according to Jacob Channel, senior economic analyst at LendingTree. This implies a rate increase of about 1.5% from current levels, which means consumers could pay an additional $150 in interest for every $10,000 of debt.
Credit cards, home equity lines of credit
Many consumers will feel the pinch through their credit cards, according to LendingTree credit expert Matt Schulz.
“Your credit card debt is going to get more expensive in a hurry, and it’s not going to stop anytime soon,” Schulz said in an email.
Expect to see higher APRs within a billing cycle or two after the Fed’s announcement, he added. After the Fed’s March hike, credit card interest rates rose on 75% of the 200 cards Schulz reviews each month, he said.
“Most Americans’ financial margin of error is small, and when gas, groceries, and seemingly everything else get more expensive and interest rates go up as well, it makes things a lot harder” , he wrote. “Now is the time for those with credit card debt to focus on reducing it.”
For example, consider a 0% balance transfer credit card or a low-interest personal loan. Consumers can also call their credit card companies and ask for a lower rate, which is often a successful approach, he added.
Other types of adjustable rate credit may also see an impact, such as home equity lines of credit and adjustable rate mortgages, which are based on the prime rate. Auto loans could also rise, although they may be more sensitive to competition for buyers, which could soften the impact of the Fed hike.
Will mortgage rates continue to rise?
Homebuyers have already been hit hard by soaring mortgage rates, which have jumped about two percentage points in one year to above 5%.
This is addedto buy a house. For example, a buyer who buys a $250,000 home with a 30-year fixed loan at last week’s average rate of 5.3% will pay $3,300 per year more than they would have paid with the same mortgage in April 2021, according to figures from the National Association of Realtors.
But the Fed’s rate hike may not translate into an immediate increase in mortgage rates, LendingTree’s Channel said.
“In fact, this latest rate hike may already be priced into mortgage rates which currently sit at an average of 5.10% for a 30-year fixed rate mortgage,” he noted. “That said, rates have risen very dramatically this year, and they could go even higher.”
Savings accounts, CDs
If there’s a benefit for consumers, it’s that savings accounts and certificates of deposit could offer higher returns.
“Rate hikes are expected to accelerate following the much-anticipated Fed rate hike in May,” Ken Tumin of DepositAccounts.com said in an email.
In April, average online bank account yields rose 4 basis points to 0.54% for savings accounts, while 5-year CDs rose 47 basis points to 1.7% .
While this is a better return for savers, it is nonetheless problematic in times of high inflation. Even with these higher rates, savers are essentially eroding the value of their money by putting it in a savings account while inflation exceeds 8%.