Americans are already stretched. They are paying more for everyday goods and services and facing high borrowing costs. On Wednesday, that financial squeeze is likely to tighten.
The Federal Reserve is widely expected to raise its short-term benchmark interest rate by a quarter percentage point, to a range of 3.75% to 4%, as it tries to bring inflation, now running at 3.4%, back toward its 2% goal.
Higher rates make borrowing more expensive, which discourages spending and cools demand. Over time, that can help slow price increases, but it can also slow economic growth and hiring. The goal is to cool the economy enough to tame inflation without tipping it into a downturn.
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The Fed is meeting Tuesday and Wednesday for the sixth of its eight regularly scheduled policy meetings this year and will announce its Open Market Committee decision at 2 p.m. Eastern time on Wednesday. Fed Chair Kevin Warsh will hold a news conference 30 minutes later.
If the Fed does raise rates — a move financial markets now put at about a 92% probability — attention will quickly turn to what comes next: Is this a one-off increase, or the beginning of a series of hikes?
“For the average person, a 25 basis point move from the Fed doesn’t move the needle too much,” said Steve Sosnick, chief strategist at Interactive Brokers. “The bigger question that we have to wrestle with if they raise rates, is whether this is the start of a trend.”
Sosnick told Straight Arrow that bringing inflation down significantly would likely require more than one or two quick hikes. A series of rate increases, he said, would make a noticeable impact on household budgets.
Here is what higher interest rates, especially if more hikes follow, could mean for your credit cards, car loans, mortgage, savings and investments.
Immediate rate hikes
Credit cards, new car loans and private student loans could become more expensive relatively quickly after a Fed rate hike.
Credit cards with variable annual percentage rates (APRs) may hike rates to match the Fed rate hike, Kate Ashford, lead wealth writer for NerdWallet, told Straight Arrow.
“Most credit cardholders should expect their cards’ APRs to rise by a quarter-point in the next couple of months,” Matt Schulz, the chief consumer finance analyst for LendingTree, said in comments shared with Straight Arrow.
“Unfortunately, the higher rate will apply to current balances and future purchases,” he said. “One increase may only add a dollar or two to many borrowers’ monthly bills, but every dollar matters when you’re already struggling with debt.”
That comes on top of credit card APRs that are already high.
A quarter-point increase by itself will not dramatically change most monthly payments. But repeated hikes can pile up, particularly for consumers carrying large balances.
“The losers are those who borrow with short-term credit cards, short-term loans, things of that nature,” Sosnick said. “They will get more expensive.”
Home equity lines of credit and some private student loans with variable rates can also become more expensive relatively quickly.
Existing fixed-rate auto loans and fixed-rate federal student loans, by contrast, will not suddenly change if the Fed raises rates. But consumers shopping for a new car loan, personal loan or other financing could face higher rates if borrowing costs continue to rise.
The impact can fall particularly hard on younger people, Sosnick said, because they are more likely to borrow for several large expenses at once, from student loans and cars to buying a first home.
“The younger you are, the more likely you are to be a debtor,” he said.
Effect on mortgages
For homebuyers, the picture is more complicated.
The Fed does not directly set mortgage rates. Thirty-year fixed mortgage rates tend to move more closely with longer-term Treasury yields, particularly the 10-year Treasury note, which reflect expectations about inflation, economic growth and future Fed policy.
That means mortgage rates can rise before the Fed acts or even move in the opposite direction from the Fed’s benchmark rate.
Lawrence Yun, chief economist at the National Association of Realtors, said homebuyers have already felt much of the impact.
“Mortgage rates have already moved higher in recent weeks ahead of the Fed’s decision,” Yun said in comments shared with Straight Arrow. “I expect very little movement in mortgage rates on the day of the Fed decision.”
The 30-year fixed-rate mortgage now averages 6.76%, according to Freddie Mac.
“The pressure on mortgage rates,” echoed Danielle Hale, chief economist at Realtor.com, “is here already and doesn’t show signs of relenting.”
As with other existing debt, fixed-rate mortgages will not be affected by Wednesday’s decision. But people trying to buy a home or refinance an existing loan will feel the pain.
However, Sosnick explained that a Fed rate hike will not necessarily drive mortgages higher.
If investors believe the Fed is taking appropriate actions to bring down inflation, longer-term Treasury yields, and eventually mortgage rates, could stabilize or even fall, Sosnick said.
“If there’s a perception that inflation will ease, you can get a situation where the Fed could hike rates and longer-term rates might actually stay relatively stable,” he said.
The opposite is also possible, he said. If investors think inflation will remain high and the Fed will need to raise rates repeatedly, longer-term borrowing costs could keep climbing.
A win for savers
One group is likely to come out ahead if the Fed raises rates: savers.
People who invest in money markets, high-yield savings accounts and new certificates of deposit (CD) will earn more.
Banks are not required to match a Fed increase dollar for dollar, however, and some may take longer than others to increase the rates they pay depositors.
“Returns aren’t at the record levels of a couple of years ago, but they’re still strong by historical standards,” Schulz said.
A rate hike could push some yields higher, he said, although banks may not immediately pass along the full increase.
Mixed bag for stocks
For stock market investors, the effect of higher rates is less straightforward.
Higher interest rates can drive down stock prices because they raise companies’ borrowing costs and make relatively safe investments such as Treasury securities more attractive.
But the stock market has mostly priced in a quarter-point increase in the Fed benchmark rate already, Sosnick said.
“The market is speaking so loudly about its expectations,” he said, that we are unlikely to see much movement in the markets on Wednesday.
Paradoxically, Sosnick said, a surprise decision to hold rates steady could send stocks lower. That is because it could create uncertainty and raise questions about the Fed’s credibility and willingness to tackle inflation.
“Markets don’t like surprises,” Sosnick said.
Tackling inflation
The Fed is considering making borrowing more expensive to ease persistent inflation. But consumers should not expect a rate hike Wednesday to suddenly bring down prices.
“Lower inflation doesn’t mean that prices are going down,” Sosnick said. “It just means the prices are going up more slowly.”
Interest rate increases take time to put downward pressure on inflation, experts said. “Don’t expect this to be some sort of magic bullet that will make things more affordable at the supermarket or certainly the gas pump,” Sosnick said.
At least short term, he said, Americans will likely be hit with high inflation and high borrowing costs at the same time.
Experts suggest ‘shopping around’
Experts told Straight Arrow that now is a good time to “shop around” for interest rate deals and higher-yielding investments.
“If you’re carrying higher-interest debt, a Fed rate hike should spur you to get serious about paying that off faster,” said NerdWallet’s Ashford, “because your interest costs will likely increase.”
On the other hand, she said, “If you have savings and your money isn’t in a high-yield savings account, now is the time to start shopping for one.”
Schulz added that “whatever the Fed does, remember that you have more power over your interest rates than you think.”
Mortgage, auto loan and personal loan rates can vary considerably from one lender to another, he said, “meaning borrowers may be able to offset at least some of the effect of higher market rates by comparing offers.”
Schulz also said consumers can simply ask their credit card issuer for a lower rate.
He pointed to a recent LendingTree survey that found that 84% of cardholders who asked for a lower APR during the previous year were successful.
Even so, he said, borrowers should “expect rates to continue to climb in the near future, so plan accordingly.”
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