Will a Fed rate hike help or hurt? How you might be affected

  • The Fed is likely to raise the target federal funds rate at its meeting next week.
  • Here’s a breakdown of what this increase could mean for you, including how it will affect your credit card, car loan, mortgage, student debt, and savings deposits.

Marriner S. Eccles Federal Reserve Building in Washington.

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After a pause last month, experts expect the Federal Reserve to raise interest rates by a quarter point at the close of its meeting next week.

Federal Reserve officials have vowed discontent with the rising cost of living, and have repeatedly expressed concern about the impact on American families.

Although inflation has begun to subside, it is still well above the Fed’s 2% target.

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Since March 2022, the central bank has raised the benchmark interest rate 10 times to a target range of 5%-5.25%, the fastest pace of tightening since the early 1980s.

Most Americans said higher interest rates hurt their finances in the past year: 77% said they were directly affected by the Fed’s moves, according to a report by WalletHub. Nearly 61% said they experienced a financial hit during this time, according to a separate report from Allianz Live found, while only 38% said they benefited from higher interest rates.

“Rising interest rates can sometimes feel like a double-edged sword,” said Kelly Lavigne, vice president of consumer insights at Allianz Life. “While savings accounts earn more interest, it is more expensive to borrow money for large purchases like a home, and many Americans worry that rising interest rates are a harbinger of a recession.”

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Any action by the Federal Reserve to raise interest rates will correspond to an increase in the base rate, which pushes financing costs higher for many types of consumer loans.

Short-term borrowing rates are the first to jump. “The cost of variable rate debt has skyrocketed,” said Brett House, professor of economics at Columbia Business School. However, “people continue to consume.”

However, “we are getting closer and closer to the point where these excess savings will be depleted and the impact of these price increases could be very rapid,” House added.

Here’s a breakdown of five ways another rate increase could affect you, in terms of how it affects your credit card, car loan, mortgage, student debt, and savings deposits.

1. Credit cards

Since most credit cards have a variable rate, there is a direct correlation to the Fed standard. As the federal funds rate rises, so does the base rate, and credit card rates follow suit.

The average credit card rate is now more than 20% down — an all-time high, while balances are higher and about half of all credit card holders take on credit card debt from month to month, according to Bank report.

If the Fed announces a 25 basis point increase next week as expected, consumers with credit card debt will spend an additional $1.72 billion in interest this year alone, according to a WalletHub analysis. Factoring in past rate increases, credit card users would end up paying about $36 billion in interest over the next 12 months, WalletHub found.

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2. Adjustable rate mortgages

Also, adjustable rate mortgages and equity lines of credit are linked to the base rate. Now, the average HELOC rate is at 8.58%, the highest rate in 22 years, according to Bankrate.

Since 15-year and 30-year mortgage rates are fixed and tied to Treasury and economy returns, homeowners will not be immediately affected by a rate hike. However, anyone shopping for a new home has lost significant purchasing power, in part due to inflation and Fed policy moves.

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage is 6.78%.

Since the next hike in interest rates is largely factored into mortgage rates, homebuyers will pay approximately $11,160 more over the life of the loan, assuming a 30-year fixed rate, according to a WalletHub analysis.

3. Car loans

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Even though auto loans are fixed, payments increase because the price of all cars goes up along with the interest rates on new loans.

For those planning to buy a new car in the next few months, the Fed’s move could raise the average interest rate on a new car loan even more. The average rate for a five-year new car loan is already 7.2%, the highest rate in 15 years, according to Edmunds.

Paying an APR of 7.2% instead of 5.2% last year could cost consumers $2,273 in interest over the course of a $40,000 72-month auto loan, according to data from Edmonds.

“The double whammy of relentlessly rising car prices and onerous borrowing costs present significant challenges for shoppers in today’s auto market,” said Evan Drury, director of insights at Edmunds.

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4. Student loans

Federal student loan rates are also fixed, so most borrowers aren’t immediately affected by the Fed’s moves. But starting in July, undergraduates who take out new direct federal student loans will pay an interest rate of 5.50%, up from 4.99% in the 2022-23 academic year.

Currently, anyone with outstanding federal education debt will benefit from rates of 0% until student loan payments resume in October.

Private student loans tend to have a variable rate tied to Libor, Prime or Treasury bill rates — meaning that as the Federal Reserve raises rates, those borrowers will also pay more interest. But how much will vary with the standard.

5. Savings accounts

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While the Fed has no direct influence on deposit rates, returns tend to be related to changes in the federal funds rate. the Savings account rates at some of the largest retail bankswhich was near rock bottom during most of the Covid pandemic, is currently at 0.42% on average.

Thanks, in part, to lower overheads, rates for high-yield online savings accounts are now at more than 5%, the highest since the 2008 financial crisis, with some short-term certificates of deposit surging, according to Bankrate.

However, if this is the Fed’s last hike for a while, “you could see yields start to ease,” according to Greg McBride, chief financial analyst at Bankrate. “Now is the time to secure it.”

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