NEW YORK — Mortgage rates have jumped, home sales have slumped and credit cards and auto loans have gotten pricier. Savings rates are slightly juicier, though.
As the Federal Reserve has rapidly increased interest rates, many economists say they fear that a recession is inevitable in the coming months — and with it, job losses that could cause hardship for households already hurt worst by inflation.
Wednesday, the Federal Reserve sharply raised its key short-term rate by three-quarters of a point for a third straight time, even as its previous rate increases are being felt by households at all income levels.
The Fed's latest move has raised its benchmark rate to a range of 3% to 3.25%, the highest level in 14 years. Its steady rate increases have already made it increasingly costly for consumers and businesses to borrow — for homes, autos and other purchases. And more hikes are almost surely coming. Fed officials are expected to signal Wednesday that their benchmark rate could reach as high as 4.5% by early next year.
Here's what to know:
HOW DOES RAISING INTEREST RATES REDUCE INFLATION?
If one definition of inflation is “ too much money chasing too few goods,” then by making it more expensive to borrow money, the Fed hopes to reduce the amount of money in circulation, eventually lowering prices.
WHICH CONSUMERS ARE MOST AFFECTED?
Anyone borrowing money to make a large purchase, such as a home, car, or large appliance, will take a hit, said Scott Hoyt, an analyst with Moody's Analytics.
“The new rate pretty dramatically increases your monthly payments and your cost," he said. "It also affects consumers who have a lot of credit card debt — that will hit right away."
That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, though they have risen lately. So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately.
“I'm not sure interest rates are top of mind for most consumers right now," Hoyt said. "They seem more worried about groceries and what’s going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around.”
HOW WILL THIS AFFECT CREDIT CARD RATES?
Even before the Fed's decision Wednesday, credit card borrowing rates have reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.
And with inflation raging, there are signs that Americans are increasingly relying on credit cards to help maintain their spending. Total credit card balances have topped $900 billion, according to the Federal Reserve, a record high, though that amount isn’t adjusted for inflation.
John Leer, chief economist at Morning Consult, a survey research firm, said its polling suggests that more Americans are spending down the savings they accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.
Those who don’t qualify for low-rate credit cards because of weak credit scores are already paying significantly higher interest on their balances, and they'll continue to.
As rates have risen, zero percent loans marketed as “Buy Now, Pay Later” have also become popular with consumers. Yet longer-term loans of more than four payments that these companies offer are subject to the same increased borrowing rates as credit cards.
For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which follows the Fed’s.
WHAT IF I WANT TO BUY A CAR?
Auto loans are at their highest levels since 2012, according to Bankrate.com’s Greg McBride. Rates on new auto loans are likely to go up by nearly as much as the Fed's rate increase. That could knock some lower-income buyers out of the new-vehicle market, said Jessica Caldwell, executive director at Edmunds.com.
Caldwell added that the entire increase isn’t passed on to consumers; some automakers are subsidizing rates to attract buyers. Bankrate.com says a 60-month new vehicle loan averaged just over 5% last week, up from 3.86% in January. A 48-month used vehicle loan was 5.6%, up from 4.4% in January.
Many lower-income buyers have already been priced out of the new-vehicle market, according to Caldwell. Automakers have been able to get top dollar for their vehicles because demand is high and supply is low. For more than a year, the industry has been grappling with a shortage of computer chips that has slowed factories worldwide.
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