Here’s Everything That Will Cost More As Fed Raises Interest Rates

Topline

The Federal Reserve on Wednesday again authorized one of the biggest interest rate hikes in 28 years as part of its effort to combat the quickest surge in prices in four decades—doubling down on a series of rate increases that is making a slew of debt offerings, including new mortgages, credit cards and some student loans, more expensive.

Key Facts

“Now is the time to aggressively pay down high-cost credit cards,” says Bankrate Chief Financial Analyst Greg McBride said in emailed comments, pointing out nearly all credit cards come with variable interest rates that fluctuate in tandem with the federal funds rate determined by the Fed.

Fueled by the Fed’s hikes, mortgage rates have surged to the highest level since the Great Recession—climbing from nearly 3.8% at the beginning of the year to roughly 6%, and pushing the average monthly mortgage payment up by about $600 as a result.

Many mortgage lending businesses have started suffering from sinking demand, and Marty Green, a principal with mortgage law firm Polunsky Beitel Green, notes the combination of higher home prices, increased interest rates and inflationary pressures has “created an environment too uncertain for many borrowers to move forward in buying a home.”

Nearly immediately after the Fed’s announcement on Wednesday, major banks—including Truist, Wells Fargo and JPMorgan—raised their prime interest rates, which are used to calculate loan costs, to 5.5%, compared to roughly 3.25% two years prior.

Though federal student loans are doled out with fixed rates (meaning existing loans won’t be affected), private loans—which represent about 8% of the market with some $131 billion in loans outstanding—often come with variable rates that tick up after Fed hikes.

One bright spot? “The outlook for savers is getting better,” says McBride, pointing out high-yielding savings accounts and certificates of deposit will raise payouts even though most banks “are likely to be stingy about passing along higher rates.”

Crucial Quote

“Rising interest rates mean borrowing costs more, and eventually savings will earn more,” says McBride, adding that households should be taking steps to “stabilize their finances,” including paying down costly credit cards and other variable-rate debt, and boosting emergency savings. “Both will enable you to better weather rising interest rates, and whatever might come next economically.”

News Peg

At the conclusion of their two-day policy meeting Wednesday afternoon, Fed officials said the central bank would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend reserves, by 75 basis points for the second month in a row. In a press conference after the announcement, Fed Chair Jerome Powell acknowledged the hikes—the largest since 1994—are “unusually” large, but said they may still be appropriate to fight inflation in September.

Big Number

$15.9 trillion. That’s how much debt American households held at the end of the first quarter—the highest amount ever, according to the New York Federal Reserve. Though most of it is contained in fixed-rate housing debt, the overall figure has climbed at the quickest pace in 14 years as fast-rising home and auto prices helped tack more more than $1 trillion in debt over the past year.

Further Reading

Fed Authorizes Biggest Interest Rate Hike In 22 Years To Fight Inflation Amid ‘Violent’ Stock Selloff (Forbes)

Has Inflation Peaked? Fed’s Favorite Indicator Says Maybe So—Despite Another ‘Startling’ Reading (Forbes)

Stocks Could Plunge Another 15% After Fed-Spurred Selloff—Will The Economy Fall Into Recession? (Forbes)