WASHINGTON (AP) — The record-low mortgages below the 3% reached last year are long gone. Credit card rates are likely to increase. So will the cost of an auto loan. Savers may eventually receive a yield high enough for peak inflation.
A substantial half-point increase in its benchmark short-term rate, announced Wednesday by the Federal Reserve, did not have an immediate impact on the finances of most Americans. But additional big hikes are expected to be announced at the Fed’s next two meetings in June and July, and economists and investors expect the fastest rate hike since 1989.
The result could be much higher borrowing costs for households in the future as the Fed battles its most painfully high inflation in four decades and ends a decades-long era of historically low rates.
Read more: Federal Reserve hikes key rate by half a point to check inflation
Chairman Jerome Powell expects that by making lending more expensive, the Fed will be able to cool demand for homes, cars and other goods and services and thus slow inflation.
Yet the risks are high. With inflation likely to remain high, the Fed may now have to raise borrowing costs even more than expected. Doing so could put the US economy in the grip of recession.
Here are some questions and answers about what rate hikes could mean for consumers and businesses:
I am considering buying a home Will mortgage rates continue to rise?
Home loan rates have risen over the past few months, partly in anticipation of the Fed’s moves, and will likely continue to rise.
Mortgage rates do not necessarily increase with the Fed’s rate hike. Sometimes they even move in the opposite direction. Long-term mortgages track the yield on a 10-year Treasury note, which, in turn, is affected by a variety of factors. These include investor expectations for future inflation and global demand for US Treasuries.
For now, however, sharp inflation and strong US economic growth are driving the 10-year Treasury rate up sharply. As a result, mortgage rates have risen by 2 full percentage points since the year began, according to Freddie Mac, from 3.1 percent at the beginning of 2022, according to Freddie Mac, on average 30-year fixed mortgages. for 5.1 percent.
To some extent, the jump in mortgage rates reflects expectations that the Fed will continue to raise rates. But the possibility of its further increase is not yet fully decided. If the Fed raises its key rate to 3.5 percent by the middle of 2023, as many economists expect, the 10-year Treasury yield will become much higher, and mortgages will become much more expensive.
How will this affect the housing market?
If you are looking to buy a home and are frustrated by the paucity of available homes, which has led to increased bidding and eye-watering bidding, this is not likely to change anytime soon.
Economists say higher mortgage rates will discourage some potential buyers. And average home prices, which are rising at an annual rate of about 20 percent, may be rising at least as slowly.
Greg McBride, chief financial analyst at Bankrate, said “a rise in mortgage rates” will dampen the pace of the increase in home prices as homebuyers will be priced higher.
Still, the number of available homes remains historically low, a trend that will frustrate buyers and keep prices high.
What about other types of loans?
For users of credit cards, home equity lines of credit, and other variable-interest loans, rates will increase at the same rate as the Fed increase, usually within one or two billing cycles. That’s because those rates are based on the banks’ prime rate, which moves in conjunction with the Fed.
Those who do not qualify for a lower rate credit card may be stuck paying higher interest on their balance. The rates on their cards will increase as per the prime rate.
Should the Fed decide to raise rates by 2 percentage points or more over the next two years — a distinct possibility — that would significantly increase interest payments.
The Fed’s hike in rates doesn’t necessarily mean raising auto loan rates the same way. Car loans are more sensitive to competition, which can slow the rate of growth.
Will I be able to earn more on my savings?
Probably, although not very likely. And it depends on where your savings, if you have them, are kept.
Savings, certificates of deposit, and money market accounts typically do not track the Fed’s changes. Instead, banks try to capitalize on the high rate environment to try to increase their profits. They do this by imposing higher rates on borrowers, without necessarily providing a juicer rate to savers.
This is especially true for large banks now. They have been flooded with savings as a result of government financial support and reduced spending by many wealthy Americans during the pandemic. They won’t need to raise savings rates to attract more deposits or CD buyers.
watch: Federal Reserve Chairman Jerome Powell gives update as Fed announces interest rate hike
But online banks and those with high-yield savings accounts may be other exceptions. These accounts are known to compete aggressively for depositors. The only catch is that they usually require significant deposits.
If you invest in mutual funds or exchange-traded funds that hold long-term bonds, they will become a risky investment. Typically, existing long-term bonds lose value as new bonds are issued at higher returns.
Still, savers are starting to see some better potential returns from Treasuries. On Tuesday, the yield on the 10-year note stood at 2.96 per cent, above 3 per cent for the first time since 2018.
Financial markets expect inflation to average 2.83 percent over 10 years. This level would give investors a positive, if very small, return of around 0.13 percent.
“All of a sudden, we end up in a position where fixed income is more competitive than it was before,” said Jason Pride, managing director of wealth management firm Glenmead.