WASHINGTON. Will mortgage rates rise? How about auto loans? Credit cards?
How about those almost invisible bank CD bets – any chance of getting a few more bucks?
As the Federal Reserve signaled on Wednesday that it would start raising its benchmark interest rate as early as March — and likely several more times this year — consumers and businesses will eventually get a feel for it.
With America’s labor market almost back to normal and inflation well above the central bank’s annual target of 2%, the Fed believes now is the time to raise the base rate from near zero.
The Fed cut its key rate after a pandemic recession hit two years ago. The idea was to support the economy by encouraging borrowing and spending. But now, by gradually making loans more expensive, the Fed hopes to stop the skyrocketing prices that are hurting consumers and businesses.
Here are some questions about what this could mean for consumers and businesses.
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I WILL CONSIDER BUYING A HOUSE. MORTGAGE RATES WILL STABLE GROWTH?
Perhaps, but it’s hard to say. Mortgage rates usually do not rise at the same time as the Fed raises rates. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the 10-year Treasury rate, which in turn is influenced by many factors. These include investor expectations for future inflation and global demand for US Treasuries.
When inflation is expected to remain high, investors tend to sell Treasury bonds because the yield on these bonds tends to make little or no return when inflation is factored in. When this happens, selling pressure on bonds tends to force Treasuries to pay higher rates. Yields then rise in response. The result could be higher mortgage rates. But not always.
DOES THIS MEAN HOUSING LOAN RATES WILL NOT GROW HIGH SOON?
Not necessary. Inflation is well above the Fed’s 2 percent target. Fewer investors are buying Treasury bonds as a safe haven. And with the expected multiple rate hikes by the Fed, the 10-year bond rate could rise over time, and so will mortgage rates.
It’s just hard to say when.
On the other hand, even when Treasury yields are comparatively low relative to inflation, as they are now, investors often still flock to them. This is especially true in times of global turmoil. Nervous investors from all over the world often invest in Treasury bonds because they are considered super safe. All of this buying pressure tends to keep Treasury rates down, which usually keeps mortgage rates relatively low.
WHAT ARE OTHER TYPES OF LOANS?
For users of credit cards, home equity lines of credit, and other variable-rate debt, rates will rise by about the same amount as the Fed hike. This is because these rates are based in part on the base rate of the banks, which changes in tandem with the Fed.
Those who are not eligible for such low interest rate credit card offers may be stuck paying higher interest on their balances because their card rates will rise with the prime rate.
A rate hike by the Fed will not necessarily raise auto loan rates. Auto loans tend to be more sensitive to competition, which could slow down growth.
WILL I FINALLY RECEIVE MORE THAN THE MINIMUM IN CDS AND MONEYMARKET ACCOUNTS?
Possibly, although it will take time.
Savings, certificates of deposit, and money market accounts generally don’t track the Fed. Instead, banks tend to capitalize on a higher interest rate environment to try and increase their profits. They do this by imposing higher rates on borrowers without necessarily offering any lower rates to savers.
Exception: banks with high-yielding savings accounts. These accounts are known for their aggressive competition for depositors. The only catch is that they usually require significant deposits.
