How faster, bigger Fed rate hikes affect credit card, mortgage, savings rates and stocks
- Fed rate hikes are expected to be big and come often during the second half of the year to combat soaring inflation.
- This means the cost of borrowing will rise for consumers and businesses.
- But savings rates may edge up.
Americans have been bracing for higher borrowing costs, with the Federal Reserve having started an interest rate hiking cycle to stymie soaring inflation. But with prices re-accelerating in May to fresh 40-year highs, those rate increases are taking on more urgency and now, investors should expect those higher costs to come faster than expected.
The Fed's policy-making committee announced another increase on Wednesday in its benchmark short-term fed funds rate. This time, it was 75 basis points, the largest one-time increase since 1994, to a range of 1.5% to 1.75%.
The move was not completely surprising. Since the May consumer price report last week showed a blistering 8.6% inflation rate, up from April’s 8.3%, economists have revised up their rate hike forecasts.
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.
“It means your debt is going to get a lot more expensive in a hurry,” says Matt Schulz, chief credit analyst at Lending Tree.
How high will interest rates go?
The Fed’s generally expected to increase rates at every meeting for the rest of this year to get inflation closer to its 2% target.
After this week, JPMorgan chief U.S. economist Michael Feroli forecasts the Fed will continue to raise rates by 50 basis points in July and September before slowing to a 25-basis-point hike per meeting pace until the fed funds rate reaches the 3.25-3.50% range early next year.
Paul Ashworth, chief North America economist at Capital Economics, was more aggressive, estimating two 75-basis-point rate hikes in a row to take the fed funds rate range to 2.25% to 2.5% in July. But that's not all.
"We previously expected the fed funds rate to peak at between 3.25% and 3.50% in the first half of next year," he said. "That forecast is obviously too low, with the peak now likely to be nearer 4%."
How does this affect my plans to buy a house?
Thirty-year fixed rate mortgages trace movements in the 10-year Treasury note and are affected by the Fed’s key short-term rate only indirectly. The outlook for the economy and inflation are also big factors.
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 much of 2022. The average 30-year fixed rate is at 5.23%, according to Freddie Mac, up from 2.96% a year ago.
“The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back,” Sam Khater, Freddie Mac chief economist, said.
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How do higher interest rates affect the stock market?
Usually, the hardest hit stocks by rising interest rates are technology and growth stocks because they rely more on borrowing to fuel their growth.
But with the dual fear of higher rates and recession (or stagflation), more sectors are getting hit this time around. The Standard & Poor’s 500 index officially fell recently into a bear market, which means the index is down at least 20% from its record high in January.
This has prompted investors to buy stocks of companies that make or sell things people must buy, like energy and consumer staples, no matter how the economy fares.
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How does Fed rate hikes affect auto loans?
A Fed rate increase Wednesday should make its way 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.
How does Fed 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.
Don’t expect a fast or equivalent increase on most savings account and CD rates, says Ken Tumin, founder of DepositAccounts.com.
Since the pandemic, banks have been flush with deposits, and demand for loans has been weak because of the COVID-19-related downturn, Tumin says. In other words, most brick-and-mortar banks don't really need your money.
Most savings rates – whether online or not – are still around 1% or less even after the initial Fed rate hikes earlier this year.
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.
Contributing: Paul Davidson