The Federal Reserve may pause its aggressive fight against inflation after Wednesday when the central bank is expected to hike interest rates for the 10th consecutive time. Even so, any future halt may not feel like much relief to consumers who’ve suffered through the last nine.
If the Fed hikes by 0.25 percentage point, as expected, it would lift the fed funds target range to between 5% and 5.25%, the highest level since 2006 and up from near zero at the start of 2021. That’s also the fastest pace of tightening since the early 1980s. The increase would finally boost the federal funds rate above the consumer inflation rate, which some economists have said is necessary to slow the economy enough to curb inflation. Annual March inflation stood at 5%.
Any pause should be music to consumers’ ears, but for many, those ears have turned away. Nearly 7 in 10 Americans said they’ve already been squeezed by the rate hikes, according to an online survey of 230 respondents conducted by WalletHub from April 17 to April 21.
“Stubbornly high prices and climbing interest rates may be testing some borrowers’ ability to repay their debts,” said Wilbert van der Klaauw, economic research advisor at the New York Fed.
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Another quarter-point rate hike will cost consumers an additional $1.7 billion over the next 12 months, bringing the annual cost of the Fed’s recent rate hikes to a total of more than $33 billion, WalletHub estimates.
“Even if this proves to be the final Fed rate hike, interest rates are still high and will remain that way,” said Greg McBride, Bankrate’s chief financial analyst.
How will my credit card rates be affected by another Fed rate hike?
The average APR on a new credit card offer stood at 23.84% at the end of April, the highest in decades, says Matt Schulz, LendingTree’s chief credit analyst, adding that “they’re probably going to still creep higher.” Consumers should start to see the increases within days of a Fed rate hike.
For those holding credit cards, the 20.92% average APR is the highest since the Fed began tracking that data in 1994 and will rise further with another rate increase. Consumers should see the rate increase within the next two billing cycles.
The higher rates will mean it may cost people still more and take a little longer to pay off credit card debt, but the goal should always be to do so, LendingTree’s Schulz said.
“Zero-percent balance transfer credit cards are about the best weapon you have in your battle against credit card debt,” he said. “They’re widely available for those with good credit and can allow you to go up to 21 months without accruing any interest. That’s a really big deal.”
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Consumers can also call their credit card companies and ask for a cut in their interest rate. More than three-quarters of cardholders who asked for a lower APR for their credit card in the past year got one, according to an April 2023 report from LendingTree. The average reduction was about 6 percentage points, which could save you $500 or more depending on how much you owe, it said.
How does this affect my plans to buy a house?
Homeowners with existing fixed-rate mortgages won’t see any changes. Recent and prospective homebuyers are feeling the higher rates, but notably, mortgage rates have been volatile and are off their 2023 peak of 6.73% in early March. As of last week, the average rate was 6.43%.
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The Fed influences but doesn’t directly set mortgage rates, so even with a rate hike, home loan costs may not increase. The expected rate hike on Wednesday has already increased the cost of a new average 30-year mortgage by $11,160 over the life of the loan, as rate hikes are usually priced into mortgage rates in advance, WalletHub said.
Other factors, like housing demand and economic outlook, also affect mortgage rates.
It’s important to note that while mortgage rates may not rise significantly with another Fed rate hike, they’re still relatively steep. The national average monthly payment on a new mortgage is $2,317, LendingTree data show.
“While borrowers can save money relative to what they would have paid for a mortgage a few months ago, they’re still going to be shelling out much more than they would have had they bought a home at the start of last year,” says Jacob Channel, LendingTree senior economist.
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How do Fed rate hikes affect auto loans?
As the availability of cars grows following an easing of supply chain issues, interest rates are now the main culprit hampering vehicle sales, says Jessica Caldwell, Edmunds’ executive director of insights.
The average APR on new financed vehicles in the first three months of the year climbed to 7%, compared with 4.4% a year earlier. That rate is the highest Edmunds has on record going back to the start of 2008. Meanwhile, the average monthly payment for a new vehicle hit a record $730, up from $656 a year earlier. And a record high 16.8% of consumers financed a new vehicle with a monthly payment of $1,000 or more, Edmunds said.
To lower monthly payments, car shoppers can increase their downpayments. The average downpayment for a new vehicle climbed to a record of $6,956 in the first three months, Edmunds said.
Those who can afford to shorten the term of their loans also did so to take advantage of lower APRs. A record 12.3% of consumers opted for 36- or 48-month loan terms, though most people extended loan terms out as much as possible to increase affordability.
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How do higher interest rates affect the stock market?
The dual fear of high inflation and recession (or stagflation) has kept stocks under wraps, until lately. Stocks posted a monthly gain in April on signs inflation’s cooling and hopes the Fed may pause rate hikes after Wednesday and any recession would be short.
Higher rates make borrowing and business investment more expensive, and they cool consumer spending, which cuts into corporate profits. Some investors are optimistic because recent corporate earnings have not been as bad as predicted. Companies’ profits could expand again once the Fed stops raising rates.
Morgan Stanley U.S. Chief Equity Strategist Mike Wilson, though, “respectfully disagrees with that assertion.” He says recent data show the economy has cooled, and corporate earnings expectations for the rest of the year “remain materially too high,” even though there are “pockets of resiliency.”
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How does the Fed’s decision affect bank savings interest rates?
For savers, deposit rates have already reached highs not seen in more than a decade so they probably won’t move up much more.
“Rates of online long-term CDs (5-year) have actually fallen slightly in the first three months of 2023,” said Ken Tumin, founder of DepositAccounts.com, which tracks depository banking products. “Those rate declines may accelerate if the Fed pauses after May.”
The average online 5-year CD yield fell to 3.95% from 4.04% at the start of the year but remains up from 1.23% last year. The highest online 5-year CD yield stands at 4.50%.
Any rate hikes stemming from recent bank failures and concerns about deposit outflows also will be temporary, Tumin said.
Online accounts still carry the highest rates, with the average rate on savings at 3.76%, up from 3.31% on January 1 and 0.50% one year ago. The highest online savings account yield is currently 5.10%.
The average online 1-year CD yield is 4.72%, up from 4.37% on January 1 and 0.74% a year ago. The highest online 1-year CD yield is 5.25%.
In comparison, the average savings account yield only gained 10 basis points in 2023 to 0.38%.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.