Will another rate hike help or hurt the Fed? How you might be affected

The Marriner S. Eccles Federal Reserve Building in Washington, DC

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After a pause last month, experts believe the Federal Reserve is likely to hike rates by a quarter point at the close of next week’s meeting.

Fed officials have vowed not to be complacent about the rising cost of living and have repeatedly expressed concern about the impact on American families.

Although inflation is beginning to cool, it is still well above the Fed’s 2% target.

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Since March 2022, the central bank has hiked interest rates 10 times to a target range of 5% to 5.25%, the fastest pace of tightening since the early 1980s.

Most Americans say rising interest rates have hurt their finances over the past year. According to a report by WalletHub, about 77% said they were directly affected by the Fed’s actions. About 61% said they had suffered a financial hit during that time, a separate Allianz Life report found, while just 38% said they had benefited from higher interest rates.

“Rising interest rates can sometimes feel like a double-edged sword,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. “While savings accounts yield more interest, it’s also more expensive to borrow money for big purchases like a home, and many Americans worry that rising interest rates are a harbinger of a recession.”

Five ways the rate hike could affect you

We think next week's Fed rate hike will be the last: Julia Coronado of MacroPolicy Perspectives

Any action by the Fed to raise interest rates will mean an increase in the federal funds rate and drive up funding costs for many types of consumer credit.

Short-term lending rates are the first to spike. “The cost of adjustable-rate debt has already increased significantly,” said Brett House, an economics professor at Columbia Business School. Yet “people continue to consume.”

However, “we’re getting closer and closer to the point where that excess savings will be depleted and the impact of those rate hikes could be felt fairly quickly,” House added.

Here’s a breakdown of the five potential impacts of another rate hike on your credit card, car loan, mortgage, student debt and savings.

1. Credit cards

Since most credit cards have a variable interest rate, there is a direct link to the Fed’s benchmark. When the policy rate goes up, so does the policy rate, and credit card rates follow suit.

According to a report by Bankrate, the average credit card interest rate is now more than 20%, an all-time high, while balances are higher and almost half of credit cardholders have card debt on a month-to-month basis.

If the Fed announces an expected 25 basis point rate hike next week, consumers with credit card debt will spend an additional $1.72 billion on interest this year alone, according to WalletHub’s analysis. Factoring in previous rate hikes, credit card users will have to pay about $36 billion in interest over the next 12 months, WalletHub noted.

2. Adjustable rate mortgages

Adjustable-rate mortgages and home-equity lines of credit are also linked to the prime rate. According to Bankrate, the average interest rate on a HELOC is currently up to 8.58%, its highest in 22 years.

Because mortgage rates for 15- and 30-year mortgages are fixed and linked to government bond yields and the economy, homeowners will not be immediately affected by a rate hike. However, anyone buying a new home has lost significant purchasing power, in part due to inflation and the Fed’s policy actions.

According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage is currently 6.78%.

With much of the upcoming rate hike anchored in mortgage rates, homebuyers will pay about $11,160 more over the life of the loan, assuming a 30-year fixed rate, according to WalletHub’s analysis.

3. Auto Loans

Krisanapong Detraphiphat | moment | Getty Images

Even when car loans are frozen, the payments continue to increase as the price of all cars increases and interest rates on new loans increase at the same time.

For those planning to buy a new car in the next few months, the Fed’s move could push the average interest rate on a new car loan even higher. According to Edmunds, the average interest rate on a five-year new car loan is already 7.2%, the highest in 15 years.

According to Edmunds, paying an annual percentage of 7.2% instead of last year’s 5.2% could cost consumers $2,273 more in interest over the course of a 72-month $40,000 auto loan.

“The twin burdens of unrelentingly high vehicle prices and skyrocketing borrowing costs are a major challenge for buyers in today’s auto market,” said Ivan Drury, director of insights at Edmunds.

4. Student Loans

Federal student loan rates are also fixed, so most borrowers are not directly affected by the Fed’s actions. But as of July, undergraduate students taking out new federal direct student loans will pay an interest rate of 5.50%, up from 4.99% in the 2022-23 academic year.

For now, anyone with existing federal education debt will benefit from 0% interest rates until student loan payments resume in October.

Private student loans typically have a variable interest rate that is tied to the Libor, prime rate, or Treasury bill rate. This means that if the Fed raises interest rates, these borrowers will also have to pay more interest. But how much more will vary by benchmark.

5. Savings Accounts

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While the Fed has no direct influence on deposit rates, yields tend to correlate with changes in the target federal funds rate. Savings account rates at some of the largest retail banks, which have been near bottoming out for most of the Covid-19 pandemic, are now averaging as much as 0.42%.

Partly due to lower overheads, interest rates for the highest-yielding online savings accounts are now over 5%, the highest since the 2008 financial crisis, with some short-term certificates of deposit being even higher, according to Bankrate.

However, if this is the Fed’s last hike for a while, “yields could start falling,” said Greg McBride, Bankrate’s chief financial analyst. “Now is a good time to capture that.”

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