Americans should prepare their finances for even higher interest rates this year.
With inflation still near a 40-year high, the Federal Reserve’s policymaking arm delivered a third consecutive three-quarters of a percentage point hike in its short-term benchmark fed funds rate to a 3% to 3.25% target range, as expected, on Wednesday, It also telegraphed more rate hikes to come as it focuses on combating inflation, so consumers should expect their costs to head even higher and job losses to mount as economic growth grinds to a halt.
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,” Greg McBride, Bankrate chief financial analyst, said.
How high will interest rates go?
Along with its mega rate hike, 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. That’s a marked increase from its June median predictions of 3.4% and 3.8%, respectively.
Economists generally expected the Fed to continue raising rates at every meeting for the rest of this year to get inflation closer to its 2% target.
“With two meetings remaining in 2022, that indicates at least one more 0.75% hike is in the offing,” McBride said.
In August, overall annual inflation dipped to an 8.3% pace from July’s 8.5%, but the core rate without the volatile food and energy sectors rose 6.3% from 5.9%. 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.
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 cumulative effect of 3 percentage points worth of interest rate hikes has cooled the housing market and caused the economy to start slowing, but hasn’t done much to lower inflation,” McBride said.
The average rate for a 30-year fixed-rate mortgage increased last week to 6.02%, a 14-year high, according to Freddie Mac’s Primary Mortgage Market Survey.
That’s dampened borrower demand for both mortgage purchases and refinances. For the week ending Sept. 9, purchase mortgage applications decreased by 29% from the same time last year, while refinance demand fell by 83%, Mortgage Bankers Association said.
House hunting trends: Buying a home? How the 2022 housing market could be shifting in your favor
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%. On a $300,000 loan, a rate of 3.11% results in a monthly payment of about $1,283, Jacob Channel, senior economist at LendingTree, said.
On that same $300,000 loan, a rate of 6.02% results in a monthly payment of $1,803. That’s an extra $520 a month and an extra $187,200 over the 30-year lifetime of the loan, he said.
How do higher interest rates affect the stock market?
The dual fear of higher rates and recession (or stagflation) are pressuring stocks, and many market strategists think stocks have another low in them this year. After the Fed’s announcement, stocks initially slid across the board but quickly were flat shortly.
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. But August’s consumer inflation report extinguished those hopes, and many economists now expect rates will have to rise higher and stay there longer.
What could trigger a downturn?: A recession is now likely in 2023. Here’s what could trigger a sharp downturn in the economy.
Higher rates make borrowing and business investment more expensive and cool consumer spending, which cuts into corporate profits.
“Implications for the financial markets are dire,” Dan North, senior economist at trade credit insurer Allianz Trade North America, said. “Rising interest rates combined with the lower earnings growth that accompany a recession, are a one-two punch to the stock market.”
Tracking the bear: We’re in a bear market – again. Here is what that means in seven charts.
Looking for a buy?: Here are the stocks to buy as the market falls and inflation rises
How do Fed rate hikes affect credit cards?
Credit card interest rates are at the highest since 1995 and going even higher. That means your debt is going to keep getting more expensive unless you act now.
“2022 has been a pretty brutal year for folks with credit card debt, and unfortunately, it is likely to get worse before it gets better,” LendingTree chief credit analyst Matt Schulz said.
You should immediately shop for a new credit card that offers a lower rate, experts say.
“A 0% balance transfer credit card may be your best weapon in the battle against credit card debt and rising interest rates,” Schulz said. Such offers are still widely available for consumers with good credit, Schulz said.
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 should make their 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.
Even so, auto loan rates are the highest since 2012, McBride said.
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.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Fed raises interest rates again. How it will hit your wallet.