How will higher Fed rates affect Americans' finances?

Long gone are the days of record-low mortgage rates below 3%. The credit card rates are likely to rise.

How will higher Fed rates affect Americans' finances?

Long gone are the days of record-low mortgage rates below 3%. The credit card rates are likely to rise. The cost of an auto loan will also rise. Finally, Savers might be able to get a yield that is high enough to keep up with inflation.

The Federal Reserve's Wednesday announcement of a substantial half-point increase in its benchmark short term rate won't have any immediate impact on the finances of most Americans. However, the Fed will announce additional substantial hikes at its next two meetings in June and July. Investors and economists expect the Fed to increase rates at the fastest rate since 1989.

As the Fed ends decades of historically low rates and fights the highest inflation in 40 years, the Fed could see households face higher borrowing costs.

Chair Jerome Powell believes that by making borrowing more costly, the Fed can cool demand for homes, cars, and other goods and slow down inflation.

But the risks are very high. The Fed might have to raise borrowing costs to keep inflation at bay. This could lead to the U.S. economy going into recession.

These are the questions and answers that will help you understand what rate increases could mean for your business and consumers.



In anticipation of Fed moves, rates on home loans have shot up in the last few months. They will likely continue to rise.

The Fed's rate hikes don't always coincide with mortgage rates moving up. Sometimes they move in the opposite direction. The yield of the 10-year Treasury note is an important factor in long-term mortgages. Investors' expectations of future inflation and the global demand for U.S. Treasurys are two examples.

However, for now, higher inflation and stronger U.S. economic growth are driving the 10-year Treasury rate sharply up. According to Freddie Mac, the average mortgage rate for a 30-year fixed mortgage has risen to 5.1%, up 2 percentage points since 2011.

The Fed is expected to keep raising its key interest rate, which is partly why the mortgage rates have risen. However, the Fed's future hikes are not yet fully priced in. Many economists predict that if the Fed raises its key rate to 3.5% by mid-2023 as many expect, then the 10-year Treasury yield and mortgages will also go up.


It's likely that the shortage of houses available for sale will continue to frustrate those who are trying to purchase a home. This has led to bidding wars and high prices.

Economists believe that buyers will be discouraged by higher mortgage rates. The average home price, which has been rising at around a 20% annual rate for the past few years, may rise at least slightly.

Greg McBride chief financial analyst at Bankrate, stated that the rise in mortgage rates will "dissipate the pace of home price appreciation" as more potential homebuyers are priced out.

However, there are still a lot of homes available, which will frustrate buyers and keep the prices high.


Auto loans can become more expensive due to Fed rate increases. However, there are other factors that affect these rates. For example, competition among car manufacturers can sometimes lower borrowing costs.

According to Alex Yurchenko (chief data officer at Black Book), which monitors U.S. car prices, rates for buyers with poor credit ratings will likely rise due to the Fed's hikes. Monthly payments will increase because used vehicle prices are on average rising.

New-vehicle loan rates are currently at 4.5%. Rates for used-vehicle loans are around 5%


Rates for credit cards, home equity loans, and variable-interest debt would increase by approximately the same amount as the Fed's hike. This usually happens within one to two billing cycles. These rates are partly based on the prime rate of banks, which moves in conjunction with the Fed.

People who aren't eligible for low-rate credit cards may end up paying more interest on their balances. Their cards' rates would rise in line with the prime rate.

The Fed could decide to increase rates by at least 2 percentage points over the next two-years, which is a possibility. This would substantially increase interest payments.


It is possible, but not very likely. It all depends on where you keep your savings (if any).

The Fed's movements are not usually tracked by savings, certificates of deposits and money market accounts. Banks tend to take advantage of a higher rate environment to increase their profits. Banks do this by increasing interest rates for borrowers but not necessarily giving better rates to savers.

This is especially true for large banks. Because of the government's financial aid and lower spending by wealthy Americans during the pandemic, they have been flooded with savings. They don't have to increase savings rates in order to attract more CD buyers or deposits.

Online banks and other high-yield savings accounts may be the exception. These accounts are well-known for being aggressively competitive for depositors. They do require large deposits.

However, some savers are beginning to see better potential returns from Treasurys. After briefly surpassing 3% in 2018, the yield on Tuesday's 10-year note was at 2.96%.

The financial markets anticipate inflation to average 2.83% in 10 years. Investors would see a positive return of around 0.13%, even though it is very low, at this level.

Jason Pride, Chief Investment Officer for Private Wealth at Glenmede, stated that fixed income suddenly becomes more competitive.


This report was contributed by Tom Krisher, AP Auto Writer in Detroit.

You need to login to comment.

Please register or login.