Here’s What Will Cost More As Fed Raises Interest Rates

Topline

The Federal Reserve on Wednesday authorized the biggest interest rate hike in 22 years as part of its effort to combat the quickest surge in prices in over 40 years, doubling down on a series of rate increases that’s already making a slew of debt offerings more expensive—including some student loans, credit cards and future mortgages.

Federal Reserve Board Chairman Jerome Powell testifies during his re-nominations hearing before the … [+] Senate last month.

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Key Facts

“Now is the time to aggressively pay down high-cost credit cards,” 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.

A couple of rate hikes alone isn’t likely to have a considerable effect on smaller-ticket items including auto financing, but on Thursday, several major banks—including Bank of America, Wells Fargo and JPMorgan—raised their prime interest rates, which are used to calculate loan costs, to 4%, compared to roughly 3.25% two years prior.

Though federal student loans are doled out with fixed rates that 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.

Mortgage rates have jumped 2 full percentage points since the beginning of the year, from nearly 3.8% to 5.3%, McBride points out, saying the increase should temper skyrocketing housing prices “as more would-be homebuyers are priced out.”

Many mortgage lending businesses are already suffering from sinking demand, but McBride says the dearth in available homes for sale (still one-third of normal levels) should help rising rates from weighing on the housing market too much.

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 50 basis points to a target range of 0.75% to 1%—a widely expected move following an initial hike of 25 basis points on March 16.

What To Watch For

On Wednesday, Fed Chair Jerome Powell ruled out increasing the federal funds rate by 75 basis points in the coming months, laying out a framework for two additional increases of 50 basis points each at upcoming meetings. That said, expectations for the pace and intensity of future rate hikes have grown more aggressive amid relentlessly strong inflation and criticism that the central bank waited too long to start raising rates. In a Friday note to clients, Bank of America economist Ethan Harris said the key risk to the economy is that inflation remains elevated next year. “Recession risks are low now, but elevated in 2023 as inflation could force the Fed to hike until it hurts,” he said. Last month’s consumer price index report will be released on May 11, and the Fed’s next policy meeting concludes on June 15.

Big Number

$15.6 trillion. That’s how much debt American households held at the end of last year—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 jumped by the biggest amount in 14 years as fast-rising home and auto prices helped mortgage balances swell by $258 billion and car loans jump by $181 billion. Credit card balances, on the other hand, increased by $52 billion, while student loan debt actually contracted by $8 billion.