Here’s how the Fed’s massive rate hikes are affecting your finances

The Fed’s latest hike – its seventh rate hike this year – will make it even more expensive for consumers and businesses to borrow for homes, cars and other purchases. On the other hand, if you have money to save, you earn a little more interest on it.

Wednesday’s rate hike, part of the Fed’s effort to rein in high inflation, was less than the previous four consecutive three-quarter-point hikes. The downward move reflects in part the easing of inflation and the slowdown in the economy.

With interest rates rising, many economists fear a recession remains inevitable – and with it job losses that could weigh on households already badly hit by inflation.

Here’s what you should know:

What causes the price increases?

The short answer: inflation. Last year, consumer inflation in the United States was 7.1% — the fifth straight monthly decline, but still a painfully high level.

The Fed’s goal is to curb consumer spending, thereby reducing demand for homes, cars, and other goods and services, ultimately cooling the economy and lowering prices.

Fed Chair Jerome Powell has acknowledged that an aggressive rate hike would cause “some pain” to households but is necessary to quell high inflation.

Which consumers are most affected?

Anyone who borrows money to make a big purchase like a house, car, or large appliance will take a hit, according to Moody’s Analytics analyst Scott Hoyt.

“The new rate increases your monthly payments and your costs quite dramatically,” he said. “It’s also affecting consumers who have a lot of credit card debt — that’s going to hit immediately.”

However, Hoyt noted that household debt payments remain relatively low relative to income, although recently they have been rising. Even if borrowing rates are steadily rising, many households may not immediately feel a much higher debt burden.

“I’m not sure interest rates are a priority for most consumers right now,” Hoyt said. “They seem more concerned about groceries and what’s going on at the pump. Prices can be a bit difficult for consumers to worry about.”

How does this affect credit card rates?

Even before the Fed’s latest move, credit card lending rates were at their highest since 1996, according to Bankrate.com, and are likely to rise further.

And with prices still rising, there are signs that Americans are increasingly relying on credit cards to sustain their spending. Total credit card balances have surpassed $900 billion, a record high, according to the Fed, although that amount isn’t adjusted for inflation.

John Leer, chief economist at Morning Consult, a survey research firm, said his survey suggests more Americans are spending the savings accumulated during the pandemic and using credit instead. Ultimately, rising interest rates could make it harder for these households to pay off their debts.

Those who do not qualify for low-cost credit cards due to poor credit are already paying, and will continue to pay, significantly higher interest rates on their balances.

As interest rates have risen, zero-percent loans, marketed as “buy now, pay later,” have also become popular with consumers. But longer-term loans of more than four payments that these companies offer are subject to the same elevated lending rates as credit cards.

For people with home equity lines of credit or other adjustable-rate debt, interest rates will rise by about the same amount as the Fed hike, usually within a accounting cycle or two. That’s because these interest rates are based in part on the banks’ benchmark rate, which tracks that of the Fed.

How are savers affected?

Soaring yields on high-yield savings accounts and certificates of deposit (CDs) have taken them to levels not seen since 2009, meaning households should increase their savings whenever possible. You can now also earn more from bonds and other fixed income investments.

Although savings, CD, and money market accounts typically don’t track Fed changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly large deposits.)

In general, banks tend to capitalize on a higher interest rate environment to increase profits by charging higher rates to borrowers without necessarily offering lower rates to savers.

Does this affect home ownership?

Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage fell to 6.33%. That means the interest rate on a typical home loan is still about twice what it was a year ago.

Mortgage rates don’t always move in line with the Fed’s reference rate. Instead, they tend to track the yield on the 10-year Treasury note.

Existing home sales have declined for nine straight months as the cost of borrowing has become too high a hurdle for many Americans who are already paying far more for groceries, gas and other necessities.

Will it be easier to find a home if I’m still looking to buy?

If you’re financially able to buy a home, you probably have more options than you ever had in the past year.

What if I want to buy a car?

Since the Fed began raising rates in March, the average new-car loan has risen more than 2 percentage points, from 4.5% to 6.6% in November, according to auto website Edmunds.com. Used car loans increased by 2.1 percentage points to 10.2%. The average credit period for new vehicles is just under 70 months, for used vehicles it is already 70 months.

Most importantly, however, is the monthly payment that most people base their car purchases on. Edmunds says it’s up an average of $61 to $718 for new vehicles since March. The average used car payment has increased by $22 per month to $565.

Ivan Drury, director of insights at Edmunds, says that financing an average new vehicle priced at $47,000 now costs $8,436 in interest. That’s enough to drive many out of the car market.

“I think we’re actually starting to see these rates doing what the Fed wants,” Drury said. “They take away purchasing power, so you can no longer buy a vehicle. There will be fewer people who can afford it.”

Any rate hike by the Fed will likely be passed on to auto borrowers, though slightly offset by subsidized rates from manufacturers. Drury predicts that new vehicle prices will ease next year as demand softens somewhat.

How have rate hikes affected crypto?

Cryptocurrencies like bitcoin have lost value since the Fed started raising interest rates. The same is true of many previously highly rated tech stocks.

Higher interest rates mean safe-haven assets like Treasuries have become more attractive to investors because their yields have risen. That makes risky assets like tech stocks and cryptocurrencies less attractive.

Nevertheless, Bitcoin continues to suffer from economic policy problems. Three major crypto firms have failed, most recently the high-profile FTX exchange, shaking crypto investor confidence.

What about my work?

Some economists argue that layoffs may be necessary to curb rising prices. One argument is that a tight labor market fuels wage growth and higher inflation. But the country’s employers continued to hire briskly in November.

“Vacancies continue to outstrip vacancies, suggesting that employers are still struggling to fill vacancies,” said Odeta Kushi, an economist at First American.

Does this affect student loans?

Borrowers taking out new personal student loans should be prepared to pay more when interest rates rise. The current range for federal loans is between about 5% and 7.5%.

However, federal student loan payments will be suspended interest-free until the summer of 2023 as part of an emergency measure introduced early in the pandemic. President Joe Biden has also announced certain loan forgiveness of up to $10,000 for most borrowers and up to $20,000 for Pell Grant recipients — a guideline that is now being challenged in court.

Is there a chance that the rate hikes will be reversed?

It is becoming increasingly unlikely that interest rates will fall any time soon. On Wednesday, the Fed signaled that it will raise its interest rate to about 5.1% early next year — and keep it there for the rest of 2023.