The Fed did it, again. How another supersize rate hike may shake up your finances.
- The Fed's delivered another super-sized interest rate hike on Wednesday to fight inflation.
- This means every consumer rate from mortgages to autos to savings will likely follow suit.
- Savings rates will rise but likely not as fast as borrowing rates.
The Federal Reserve did it, again.
It boosted interest rates again by a whopping 0.75 percentage point on Wednesday and suggested more rate hikes are coming. That means Americans should brace themselves for even higher interest rates.
With inflation still at the highest level in a generation, the Fed's policy-making arm delivered a fourth consecutive mega three-quarters of a percentage point hike in its benchmark rate to a 3.75% to 4% target range at the end of its meeting on Wednesday. It's the sixth straight rate hike this year and brings the fed funds target range to the highest level since 2008 from between 0% and 0.25% at the start of the year.
The Fed also said it expects "ongoing increases" in rates as it continues to focus on combating inflation, so consumers should expect their costs to head even higher and job losses to mount as economic growth slows.
Although the Fed doesn’t directly control consumer interest rates, its rate increases ripple through the economy and ultimately, hit businesses and consumers and slow demand and inflation.
“Given the environment of rising rates and a slowing economy, the financial steps for households to take are boosting emergency savings, paying down high-cost debt, and maintaining contributions into, and a long-term perspective on, retirement accounts,” said Greg McBride, Bankrate chief financial analyst.
Link between rates and inflation:Why does the Fed raise interest rates? And how do those hikes slow inflation?
How high will interest rates go?
The Fed raised rates Wednesday by 75 basis points, marking the fourth consecutive increase of that size, but that won't be the end.
The Fed's year end median fed funds forecast is 4.4% and 4.6% next year before heading lower, according to its economic projections released in September. That means there’s likely another rate increase coming at the Fed meeting in December.
Economists generally expect the Fed to slow its rate hikes in December with a half-point rise to get inflation closer to its 2% target, but another 0.75-point hike isn’t out of the question. Deutsche Bank analysts, for now, expect a fifth consecutive supersize 0.75-point rate increase in December as inflation and the labor market continue to run hot.
In September, overall annual inflation dipped to an 8.2% pace from August's 8.3%, but the core rate without the volatile food and energy sectors rose 6.6%, from 6.3% the prior month and the largest increase since August 1982. Both topped economists' mean forecast and unleashed worries that inflation's getting entrenched in areas that'll be harder to control if the Fed doesn't act faster.
The private sector added in October 239,000 jobs, more than economists had forecast, and annual pay dipped 0.1% to 7.7%, according to ADP on Wednesday morning. The strong data come a day after the government said job openings increased to 10.7 million in September, which also surprised many economists who had expected a decline and can continue to give the Fed a headache.
How does this affect my plans to buy a house?
Homeowners with existing fixed-rate mortgages won’t see any changes. But recent and prospective homebuyers are being socked by higher rates that take into account projected Fed increases through 2022.
"The speed at which mortgage rates have risen is more destabilizing than the actual level of rates,” said Yelena Maleyev, KPMG economist. “We have seen mortgage rates higher than 7% before, but we never have seen rates double in a matter of months. “
The average rate for a 30-year fixed-rate mortgage in the week ended Oct. 21 was 7.16%, the highest rate since 2001, according to Mortgage Bankers Association (MBA).
That's dampened borrower demand for both mortgage purchases and refinances. For the week ending Oct. 21, mortgage applications fell 1.7% to the slowest pace since 1997, MBA said. Refinance applications were essentially unchanged, but purchase applications declined 2% to the slowest pace since 2015 and more than 40% behind last year’s clip, it said.
How bad is it?:Is the US housing market in a recession or a correction?
To put into perspective just how much rising rates can impact borrowers getting a new loan, consider the average 30-year, fixed mortgage rate on Dec. 30 was 3.11%, 4.05 percentage points lower than the latest average of 7.16% on Oct. 21. On a $300,000 loan, a rate of 3.11% results in a monthly payment of about $1,283.
On that same $300,000 loan, a rate of 7.16% results in a monthly payment of $2,028. That’s an extra $745 a month, an extra $8,940 a year, and an extra $268,200 over the 30-year life of the loan.
How do higher interest rates affect the stock market?
The dual fear of higher rates and recession (or stagflation) has pressured stocks, but now more market strategists are split on whether they think stocks have another low in them this year.
The S&P 500 officially fell earlier this summer into a bear market, which means the index is down at least 20% from its record high in January and had climbed back on hopes the Fed's aggressive rate hikes would ease. September's still hot consumer inflation report extinguished those hopes briefly, but now with a crumbling housing market and slowing labor market, some think the Fed will slow the pace of rate hikes and give stocks a chance to bounce back.
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Higher rates make borrowing and business investment more expensive and cools consumer spending, which cuts into corporate profits. But so far, some note earnings haven’t been hit as bad as some would have thought.
Morgan Stanley Chief Equity Strategist Mike Wilson noted S&P 500 earnings had so far topped analysts’ expectations by 5.8%, in-line with the historical average beat rate of about 5%.
How do Fed rate hikes affect credit cards?
Credit card interest rates are at the highest since mid-1990s and are notoriously among the highest ones you'll pay with annual percentage rates already near record highs, but they're going even higher. That means your debt is going to keep getting more expensive unless you act now.
You should immediately shop for a new credit card that offers a lower rate, experts say.
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"0% balance transfer credit cards are still widely available, especially for those with good credit, and can help you avoid accruing interest on the transferred balance for up to 21 months," said Matt Schulz, LendingTree chief credit analyst. "That's a really long time and can be an absolute godsend for folks struggling with card debt." But make sure to use that to pay off as much of the debt you move to that card as you can and not to charge anymore on it.
You also can call your card issuer to request a lower rate on your cards.
"It can be scary to pick up the phone and negotiate with a big bank, but data shows that 70% of those who ask for a lower interest rate on their credit card in the past year got one," he said.
How do Fed rate hikes affect auto loans?
Fed rate increases trickle down to new auto loans, but the toll should be less painful. Typically, the cost of a quarter-point increase in rates on a $25,000 loan is just a few dollars extra per month, experts say.
Even so, new auto loan rates in the third quarter rose to 5.7%, the highest since 2019, according to Edmunds.com. The average amount financed for new vehicles also climbed to a record high $41,347 from $40,602 in the second quarter and $38,315 a year ago, it said.
Meanwhile, a record 14.3% of consumers who financed a new vehicle purchase committed to a monthly payment of $1,000 or more, compared to 12.2% the prior quarter and 8.3% a year earlier, Edmunds.com reported.
How does Fed's decision affect bank savings interest rates?
As Fed rates rise, banks will be able to charge a little more for loans, giving them more profit margin to pay a higher rate on customer deposits.
"For savers, high-yield savings accounts and certificates of deposit are at levels last seen in 2009,” McBride said.
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If investors are looking to collect as much yield as they can on their savings, look online. Online rates as of Oct. 27 ranged from 1.5% at the low for a savings account with no minimum to as high as about 4% for a 5-year CD with a $1,500 minimum deposit. That contrasts with brick-and-mortar rates of 0.21% to 0.83%, respectively.
"Long term cash returns are rebounding as the era of low rates ... starts to reverse," Bank of America analysts said in September. "We expect positive returns for the foreseeable future with Fed funds expected to touch 4.25% by early next year. Holding cash is becoming more attractive and it allows investors to build a war chest for when the market finally does bottom."
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.