Interest rates are going up again, according to a Wednesday announcement by the Federal Reserve Bank.
What does that mean for your wallet?
CNBC compiled a list of four ways Americans can expect to be impacted by the rate hike: increased credit card rates, increased auto loan costs, increased student loan costs and a continuation of high mortgage rates.
Why did the Fed raise rates?
“The Board of Governors of the Federal Reserve System voted unanimously to raise the interest rate paid on reserve balances to 4.65 percent,” effective Thursday, said the bank. “In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point increase in the primary credit rate to 4.75 percent,” also effective Thursday.
“Recent indicators point to modest growth in spending and production,” said a press release regarding the decision. “Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated.”
At the same time, the continuing Russian invasion of Ukraine is contributing to global economic uncertainty.
According to the Fed, the goal of raising interest rates – which make borrowing money more expensive – is to “achieve maximum employment and inflation at the rate of 2 percent over the longer run.”
“The easing of inflation pressures is evident, but this doesn’t mean the Federal Reserve’s job is done,” said Greg McBride, chief financial analyst at Bankrate.com quoted by CNBC. “There is still a long way to go to get to 2% inflation.”
However, rate increases put financial pressure on Americans and, per NerdWallet, the Fed raised rates seven times last year. Consumer stress levels were already up around 15% compared to 2022 as of last month, according to WalletHub.
How will you be impacted?
“The Fed’s moves do affect the borrowing and saving rates consumers see every day,” according to CNBC. McBride said that inflation, which increased by 6.5% during the 12-month period ending in December, “has shredded household budgets and, in many cases, households have had to lean against credit cards to bridge the gap.”
Going back to CNBC’s list – the outlet said that “since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark,” and consumers should expect to feel a credit squeeze. WalletHub estimated last month that this rate hike will cost credit card users at least an additional $1.6 billion in interest charges in 2023.
“Credit card interest rates are already as high as they’ve been in decades,” said Matt Schulz, chief credit analyst at LendingTree quoted by CNBC.
Auto loans are also expected to get more expensive, as car prices increase along with interest rates on new loans.
“If you are planning to buy a car, you’ll shell out more in the months ahead,” said CNBC.
Anyone who plans to begin borrowing money for college should also be ready for loans with increased interest rates. CNBC reported that the interest rate on federal student loans taken out for the 2022-23 academic year already was 4.99%, up from 3.73% the previous year. Loans disbursed after July 1 are expected to have even higher rates.
Additionally, mortgage rates – now at a 10-year-high – are expected to stay high with the Fed’s recent rate increase. Even so, these rates decreased the week ending Thursday, according to CNN Business.
“We’re still a ways away from the housing market being truly affordable, even if it has recently become a bit less expensive,” said to Jacob Channel, senior economist at LendingTree.
On the bright side…
While the interest rate hike is expected to put even more financial stress on Americans, there are some bright spots on the economic horizon.
“With rates still rising and inflation now declining, it is the best of both worlds for savers,” said McBride.
This rate hike was also smaller than other recent hikes, which CNN Business said “signaled promising improvement on inflation.” According to the Bureau of Labor Statistics, inflation did ease slightly in December.
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