Fed downsizes rate hike to a half point this month, but those in debt find little relief
- The Fed raised rates by a half percentage point after its policy meeting Wednesday.
- That's a step down from its 0.75-point interest rate hikes after each of its last four meetings.
- However, consumers aren't likely to find comfort in this as the cost of their debt rises again.
The Federal Reserve took its foot off the accelerator but is continuing to move ahead with more interest rate hikes.
It boosted interest rates for the seventh consecutive time this year on Wednesday, but “only” by a half point, instead of the three-quarter percentage-point jump we’ve seen after each of the last four policy meetings. The slower pace will give the economy a chance to digest the string of aggressive rate hikes so far this year, but consumers shouldn’t get complacent. There’s likely more rate indigestion ahead, and Americans should brace themselves for even higher interest rates, economists say.
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With inflation easing to 7.1% in November but remaining stubbornly near the highest level in a generation, the Fed is still far from its 2% inflation goal and needs to keep raising rates to slow the economy to cool inflation further, economists say. The increase in the short-term benchmark fed funds rate on Wednesday brings the target range to between 4.25% and 4.5%, the highest level since 2007 and from 0% to 0.25% at the start of the year.
The Fed also said it expects more rate increases, noting in its statement that it "anticipates that ongoing increases in the target range will be appropriate" to return inflation back to its 2% goal. In other words, consumers should expect their costs to head even higher and job losses to mount as economic growth slows.
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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.
“With the Fed to continue hiking rates in 2023, consumer borrowing and savings rates will climb further,” said Greg McBride, Bankrate chief financial analyst. “Pay down costly credit card debt and boost emergency savings to better weather whatever may lie ahead economically.”
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How high will interest rates go?
The Fed boosted rates by 50 basis points on Wednesday, but that won't be the end.
The Fed released its economic projections along with its policy decision at this meeting and bumped up its 2023 median fed funds forecast to 5.1%, from 4.6% in its September predictions, as the labor market continues to hold up well. The persistently strong labor makes the Fed’s job harder because consumers with jobs and bigger paychecks can keep spending, which buoys inflation.
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In November, overall annual inflation eased more than expected to 7.1% from October's 7.7%, with the core rate without the volatile food and energy sectors up 6%, from 6.3% the prior month.
The private sector added 263,000 jobs in November, more than economists had forecast, and annual pay dipped 0.1% to 7.6%, according to ADP. The strong data confirms a still strong labor market, with 10.3 million job openings at the end of October, only a step down from September’s 10.7 million. And with so much demand still for workers, wage increases can keep inflation hot.
"The roughly 5% pace of wage growth is likely to keep the Fed in inflation-fighting mode for a while yet," wrote Wells Fargo senior economist Sarah House in a report.
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How does this affect my plans to buy a house?
Homeowners with existing fixed-rate mortgages won’t see any changes. Mostly recent and prospective homebuyers are feeling the higher rates, but notably, mortgage rates have stabilized recently and even dipped as inflation has shown signs of having peaked.
“Despite what will likely be another rate hike from the Fed, mortgage rates could actually continue to trend down over the coming weeks,” said Jacob Channel, LendingTree senior economist. “The average rate for a 30-year, fixed-rate mortgage currently sits at 6.33%, and has fallen each week since mid-November when it peaked at 7.08%.”
It’s important to remember, though, mortgage rates are at the highest level since 2008. “These relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel said.
That's dampened borrower demand for both mortgages and purchases. For the week ending Dec. 2, mortgage applications fell 1.9% even as mortgage rates trended lower, Mortgage Bankers Association said. Refinance applications rose from the prior week, but purchase activity slowed, it said.
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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%, 3.22 percentage points lower than the latest average of 6.33% on Dec. 8. 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 6.33% results in a monthly payment of $1,863. That’s an extra $580 a month, an extra $6,960 a year, and an extra $208,800 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, with most market strategists forecasting that stocks have room to drop next year, according to a Deutsche Bank of global market participants.
The S&P 500 officially fell earlier this summer into a bear market, which means the index dropped at least 20% from its record high in January, and has climbed back on hopes the Fed's aggressive rate hikes would ease. However, 79% of 856 market participants Deutsche asked between Dec. 7 and 9 said they think the bellwether, broad market S&P 500 index won’t hit bottom until at least 2023.
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.
“The corporate earnings outlook is “less bad” than in previous periods of economic stress,” said Kelly Bogdanova, RBC Wealth Management portfolio analyst, said. “Even if a recession materializes and brings with it deeper cuts to consensus earnings estimates, we think household spending would be relatively more resilient than in recent economic contractions. Household balance sheets appear to be in better shape due to sturdier employment trends and high savings levels when this period began.”
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How do Fed rate hikes affect credit cards?
Credit card interest rates are notoriously among the highest ones you'll pay with annual percentage rates (APR) 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.
Not only is the average APR on a new credit card above 22%, but those accruing interest, meaning ones that carry a balance from month to month, is 18.43%, Fed data show. “That's a full percentage point higher than it has been at any time since the Fed began tracking in 1994, and it's almost certain to keep climbing,” said Matt Schulz, LendingTree chief credit analyst.
Credit card balances also surged in the third quarter by15% year-over-year, marking the largest increase in more than 20 years, propelling total credit card debt to $930 billion, just shy of the record, the New York Fed said. Credit cards are the most prevalent type of debt in the U.S., with more than 500 million open accounts and 191 million Americans with at least one credit card account, it said.
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Wednesday's rate hike will cost people with credit card debt at least an extra $3.2 billion in the next year alone, according to WalletHub. That’s on top of the $22.9 billion increase already caused by the Fed’s previous rate hikes this year, it said.
Those people should immediately shop for a new credit card that offers a lower rate, experts say.
"If you've got credit card debt but still have strong credit, you're doing yourself a profound disservice if you don't consider a 0% balance transfer credit card,” Schulz said. “These cards can save you a lot of money any time, but when credit card rates are this ridiculously sky-high, they're an even better deal. They're still widely available, they're still offering durations of up to 21 months, and they're still about the best weapon that you can have in your arsenal against credit card debt."
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.
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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 rose in October to 6.3%, the highest since April 2019, according to Edmunds.com. The rate for used vehicles climbed to 9.6%, the highest since February 2010. To lower monthly payments, car shoppers are opting for longer auto loan terms, Edmunds said.
"The last time interest rates were this high, consumers could at least rely on lower vehicle prices and a greater range of inventory to soften the blow.” said Jessica Caldwell, Edmunds' executive director of insights. “That simply isn't the case in this market."
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How does the Fed's decision affect bank savings interest rates?
For savers, deposit rates are reaching highs not seen in more than a decade, and they’re likely to continue climbing as the Fed continues to raise rates.
"The heated competition among smaller banks and online banks is a win for consumers willing to move their savings." McBride said. "No need to move all of your accounts, just your savings, and you can link it back to your current checking account."
But beware of longer-dated savings vehicles.
"Future rate gains may be limited to savings accounts and short-term CDs,” or certificates of deposit, said Ken Tumin, a senior industry analyst at Lending Tree and founder of DepositAccounts.com. “Long-term CD rate gains have slowed and in a few cases, rates have declined in a way that has been similar to long-dated Treasury yield declines.”
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The yield on 30-year Treasuries has declined recently on bets inflation has peaked, and the Fed will soon stop raising rates and maybe, even cut rates in late 2023. Most economists, though, don’t believe this is true given that inflation is still more than three times above the Fed’s 2% goal.
If investors are looking to collect as much yield as they can on their savings, look online. The average online savings account yield is about 3.02%, 1-year CD yield about 4.15% and 5-year CD yield near 4.00%. Those compare to the average brick-and-mortar savings account yield of 0.25%.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.