WASHINGTON ( Associated Press) — The record-low mortgages below 3% 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.
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 house. Will mortgage rates keep rising?
Home loan rates have risen over the past few months, mostly in anticipation of the Fed’s move, 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 jumped 2 full percentage points since the beginning of the year, averaging 5.1% for a 30-year fixed mortgage, according to Freddie Mac.
To some extent, the jump in mortgage rates reflects expectations that the Fed will continue to raise its key rate. But the possibility of its further increase is not yet fully decided. If the Fed raises its key rate to 3.5% by mid-2023, as many economists expect, the 10-year Treasury yield will become much higher, and mortgages will become 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 about a 20% annual rate, 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 auto loans?
Fed rate hikes could make auto loans more expensive. But other factors also affect these rates, including competition among car makers that can sometimes lower borrowing costs.
The Fed’s hike is likely to result in higher rates for buyers with lower credit ratings, said Alex Yurchenko, chief data officer at Black Book, which tracks US vehicle prices. As the prices of used vehicles are rising on average, so will the monthly payment.
For now, new vehicle loans average around 4.5%. Used-vehicle rates are around 5%.
What about other rates?
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.
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.
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.
Still, savers are starting to see some better potential returns from Treasuries. The yield on the 10-year note stood at 2.96% on Tuesday after rising above 3% for the first time since 2018.
Financial markets expect inflation to average 2.83% over 10 years. This level would give investors a positive, if very small, return of around 0.13%.
“All of a sudden, we end up in a position where fixed income is more competitive than it was before,” said Jason Pride, Private Wealth’s chief investment officer at Glenmead.
Associated Press Auto writer Tom Crischer in Detroit contributed to this report.