What Fed’s rate hike means
Americans can expect higher borrowing costs as central bank preps for additional increases
WASHINGTON — Record-low mortgages below 3%, reached last year, are long gone. Credit card rates will likely rise. So will the cost of an auto loan. Savers may finally receive a yield high enough to top inflation.
The half-point hike that the Federal Reserve announced Wednesday in its benchmark short-term rate won’t, by itself, have much immediate effect on most Americans’ finances. But additional large hikes are expected to be announced at the Fed’s next two meetings, in June and July, and economists and investors foresee the fastest pace of rate increases since 1989.
The result could be much higher borrowing costs for households well into the future as the Fed fights the most painfully high inflation in four decades and ends a decadeslong era of historically low rates.
Chair Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services and thereby slow inflation.
Here are some questions and answers about what the rate hikes could mean for consumers and businesses:
Q: Will mortgage rates keep going up? A:
Rates on home loans have soared in the past few months, partly in anticipation of the Fed’s moves, and will probably keep rising.
Mortgage rates don’t necessarily move up in tandem with the Fed’s rate increases. 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 a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasurys.
For now, though, faster inflation and strong U.S. economic growth are sending the 10-year Treasury rate up sharply. As a consequence, mortgage rates have jumped 2 full percentage points just since the year began, to 5.1% on average for a 30-year fixed mortgage, according to Freddie Mac, up from 3.1% at the start of 2022.
Q: How will that affect the housing market? A:
If you’re looking to buy a home and are frustrated by the lack of available houses, which has triggered bidding wars and eye-watering prices, that’s unlikely to change anytime soon.
Economists say that higher mortgage rates will discourage some would-be purchasers. And average home prices, which have been soaring at about a 20% annual rate, could at least rise at a slower pace.
Q: What about other kinds of loans? A:
For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise 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 moves in tandem with the Fed.
Those who don’t qualify for low-rate credit cards might be stuck paying higher interest on their balances. The rates on their cards would rise as the prime rate does.
Should the Fed decide to raise rates by 2 percentage points or more over the next two years — a distinct possibility — that would significantly enlarge interest payments.
The Fed’s rate hikes won’t necessarily raise auto loan rates as much. Car loans tend to be more sensitive to competition, which can slow the rate of increases.