WASHINGTON (AP) – Higher mortgage rates have sent home sales plummeting. Credit card rates have grown more, and so have auto loans. Savers finally receive returns that are actually visible, while crypto assets are appreciated.
The Federal Reserve’s decision on Wednesday to further tighten credit raised its benchmark interest rate by a hefty 0.75 percentage points for the second time in a row. The Fed’s latest rate hike, the fourth since March, will further increase home, car and credit card borrowing costs, though many borrowers may not feel the impact immediately.
The central bank is aggressively raising borrowing costs in an attempt to curb spending, cool the economy and beat the worst outbreak of inflation in two generations.
The Fed’s actions have ended, for now, an era of ultra-low rates that emerged from the Great Recession of 2008-2009 to help rescue the economy, then re-emerged during the brutal pandemic recession , when the Fed cut its benchmark rate. close to zero
President Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in curbing demand for homes, cars and other goods and services. The spending cut could help bring inflation, recently measured at a four-decade high of 9.1 percent, back to the Fed’s 2 percent target.
However, the risks are high. A series of higher rates could send the US economy into recession. That would mean higher unemployment, more layoffs, and more downward pressure on stock prices.
How will all this affect your finances? Here are some of the most frequently asked questions about the impact of the rate hike:
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I’M THINKING OF BUYING A HOUSE. WHAT ABOUT MORTGAGE RATES?
Higher interest rates have torpedoed the housing market. Home loan rates have almost doubled since a year ago to 5.5%, although they have stabilized in recent weeks, although the Fed has signaled that it is likely adjust credit further.
That’s because mortgage rates don’t necessarily move in tandem with Fed hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which in turn is influenced by several factors. These factors include investors’ expectations about future inflation and overall demand for US Treasuries.
Investors expect a recession to hit the US economy late this year or early next year. That would force the Fed to cut its benchmark rate in response. The expectation that the Fed will have to reverse some of its hikes next year has helped push the 10-year yield down from 3.5% in mid-June to about 2.8%.
WILL FIND A HOME BE EASIER?
Existing home sales have fallen for five consecutive months, while new home sales fell in June. If you are financially able to move forward with buying a home, you likely have more options than you did a few months ago.
In many cities, the options are few. But the number of available homes across the country has started to rise after falling to record lows at the end of last year. There are now 1.26 million homes for sale, according to the National Association of Realtors, up 2.4% from a year ago.
I NEED A NEW CAR. SHOULD YOU BUY ONE NOW?
Fed rate hikes tend to make auto loans more expensive. But other factors also affect those rates, including competition among automakers, which can sometimes lower borrowing costs.
Wednesday’s rate hike won’t affect new vehicle sales much because those buyers are mostly affluent customers who won’t be squeezed by a relatively small increase in monthly payments, said Jonathan Smoke, chief economist at Cox Automotive. Instead, he said, used car buyers with weaker credit who pay higher loan rates could be hurt.
“Many used vehicle buyers are already feeling the impact of higher energy, food and rental prices,” Smoke said.
Used vehicle prices have started to come down, he noted, and vehicle availability is starting to return to normal levels.
According to Bankrate.com, the full amount of a Fed rate hike doesn’t always flow to auto loans. New 60-month loans for new vehicles have risen about a percentage point this year to an average of 4.86%, according to Bankrate.com, while the 48-month used vehicle rate rose just under 1 point up to 5.38%.
WHAT WILL HAPPEN WITH MY CREDIT CARD?
For users of credit cards, home equity lines of credit and other variable-rate debt, rates would rise by about the same amount as the Fed’s hike, typically in one or two billing cycles. That’s because these rates are based in part on the banks’ prime rate, which moves in tandem with the Fed.
Those who don’t qualify for low-rate credit cards can get stuck paying higher interest on their balances. The rates on your cards would increase as the principal rate does.
The Fed’s rate hikes have already sent credit card borrowing rates above 20% for the first time in at least four years, according to LendingTree, which has tracked the data since 2018.
HOW WILL THIS AFFECT MY BREAKOUTS?
Now you can earn more in bonds, CDs and other fixed income investments. And it depends on where your savings are parked, if you have any.
Savings, certificates of deposit, and money market accounts typically don’t track Fed changes. Instead, banks tend to capitalize on a higher rate environment in an attempt to increase their profits. They do this by imposing higher rates on borrowers, without necessarily offering any kind of suppressor to savers.
But online banks and others with high-yield savings accounts are usually an exception. These accounts are known to compete aggressively for depositors. The only problem is that they usually require large deposits.
HOW HAVE RATE INCREASE AFFECTED CRYPTO?
Like many highly valued tech stocks, cryptocurrencies like bitcoin have fallen in value since the Fed began raising rates. Bitcoin has fallen from a high of around $68,000 to $21,000.
Higher rates make safe assets like bonds and Treasuries more attractive to investors because their yields are now higher. This, in turn, makes risky assets like tech stocks and cryptocurrencies less attractive.
That said, bitcoin suffers from its own problems that are separate from economic policy. Two major crypto companies have failed. The shaken confidence of crypto investors isn’t helped by the fact that the safest place you can park your money now, bonds, looks like a safer move.
WILL MY STUDENT LOAN PAYMENT GO UP?
Right now, federal student loan payments are suspended until Aug. 31 as part of an emergency measure that was put in place early in the pandemic. Inflation means loan holders have less disposable income to make payments. Still, a slowing economy that lowers inflation could provide some relief from the downturn.
Depending on the state of the economy, the government may choose at the end of the summer to extend the emergency measure that postpones loan payments. President Joe Biden is also considering some form of loan forgiveness. Borrowers taking out new private student loans should prepare to pay more. Fees vary by lender, but are expected to increase.
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Associated Press reporters Ken Sweet, Tom Krisher, Adriana Morga and Cora Lewis contributed to this report. Morga and Lewis cover financial literacy for The Associated Press. The Associated Press is supported by the Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.