The Federal Reserve may raise interest rates again.Preparation method

The Federal Reserve is widely expected to announce its eighth consecutive rate hike at this week’s policy meeting.

This time, as inflation begins to ease, Fed officials are likely to approve a 0.25 percentage point hike, a more modest pace compared to previous mega moves in 2022.

Still, higher benchmark interest rates mean borrowers pay more interest on credit cards, student loans and other types of debt. Conversely, savers benefit from higher yields. can do.

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“The good news is the worst is over,” said Yiming Ma, assistant professor at Columbia Business School.

The US Central Bank is now at the bottom of a rate hike cycle that has raised the benchmark rate by 4.25% in less than a year.

Inflation is still above the Fed’s long-term target of 2%, but price pressures will “be significantly reduced and the pace of rate hikes will slow,” he said.

The goal is to curb runaway inflation by raising borrowing costs and effectively putting the brakes on the economy.

The Federal Funds Rate, set by the central bank, is the rate at which banks borrow and lend to each other overnight. Directly or indirectly, the Fed’s interest rate hikes will affect consumer borrowing costs.

Here’s a breakdown of how it works:

credit card

Since most credit cards have variable interest rates, they are directly related to the Fed’s benchmark. As the federal funds rate rises, so does the prime rate, followed by credit card rates. Cardholders typically see impact within 1-2 billing cycles.

After rising at its steepest annual pace ever, average credit card interest rates are now averaging 19.9%, the highest ever. Along with the Fed’s commitment to keep raising benchmarks to combat inflation, credit card annual rates will continue to rise as well.

With incomes not keeping up with inflation, households are increasingly relying on credit to cover basic necessities. This is compounded by the growing number of borrowers with monthly balances.

Greg McBride, chief financial analyst at Bankrate.com, said: “Credit card balances are rising at the same time that credit card interest rates are hitting record highs. It’s a bad combination.” Stated.

If you currently have credit card debt, tap a low-interest personal loan or a 0% balance transfer card and pay additional fees unless you can pay off your balance in full at the end of the month and have some money set aside. Please refrain from purchasing. McBride advised.

Housing loan

While 15- and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, inflation and changes in Fed policy have contributed to a considerable amount of purchasing power for new home buyers. I am losing

“Despite further rate hikes by the Fed, mortgage rates could actually stay close to current levels or continue to trend slightly lower in the coming weeks,” said Jacob Channel, senior economist at LendingTree. has potential,” he said.

Average 30-year fixed-rate mortgage rates are now at 6.4%, down from a mid-November peak of 7.08%.

Still, “these relatively high interest rates, combined with persistently high home prices, mean that buying a home remains difficult for many,” Channel added.

Adjustable rate mortgages (ARMs) and home equity lines of credit (HELOCs) are pegged to the prime rate. When the Federal Funds Rate rises, so does the Prime Rate, and so do these rates. Most ARMs calibrate once a year, HELOCs calibrate immediately. Already, the average HELOC rate has increased from 4.11% a year ago to 7.65%.

auto loan

Auto loans are fixed, but the payments are getting bigger because the price of all cars is going up and interest rates on new loans are going up. So if you’re planning on buying a car, you’ll be paying a lot more in the coming months.

The average five-year new car loan interest rate is now 6.18%, up from 3.96% in early 2022.

Thomas King, president of data and analytics at JD Power, said in a statement:

Car shoppers with higher credit scores may be able to secure better loan terms or look to some used car models for better pricing.

student loan

Interest rates on federal student loans are also fixed, so most borrowers won’t be immediately affected by the rate hike. Federal student loan rates for 2022-23 have already increased to 4.99% from 3.73% last year and 2.75% in 2020-21. Loans paid after July 1st can be even more expensive.

Private student loans tend to have variable interest rates linked to Libor, Prime, or Treasury note rates. In other words, when the Fed raises interest rates, these borrowers will pay more interest. But more than that depends on the benchmark.

For now, anyone with existing federal education debt can benefit from 0% interest until the suspension of payments ends.

savings account

On the plus side, after a series of rate hikes, some savings accounts have higher interest rates.

The Federal Reserve does not directly affect deposit rates, but interest rates tend to correlate with changes in the target federal funds rate. Interest rates on savings accounts at some large retail banks, which were near the bottom for most of the coronavirus pandemic, are now averaging 0.33%.

Thanks in part to reduced overheads, online savings accounts yield a high 4.35%, according to Bankrate, well above the average rate of traditional brick-and-mortar banks.

“If you’re shopping, you’re finding the best returns since the Great Financial Crisis. If you’re not shopping, you’re making almost nothing,” McBride said.

Still, sub-inflation money has lost purchasing power over time, and more households are generally saving less.

“The best advice is to start a side business to get extra income, even if it’s temporary, and pay by depositing directly into your savings account first,” McBride advised. I will find a way to save you.”

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