https://www.cnbc.com/2022/09/19/here-are-5-ways-the-next-federal-reserve-rate-hike-could-impact-you.html

PUBLISHED MON, SEP 19 20229:33 AM EDTUPDATED MON, SEP 19 202211:22 AM EDT

Jessica Dickler@JDICKLER

This week, the Federal Reserve will likely raise rates by another three-quarters of a percentage point for the third consecutive time in an effort to cool down the high cost of living. 

The U.S. central bank has already raised interest rates four times this year, for a total of 2.25 percentage points. 

Fed officials have “declared inflation as ‘public enemy No. 1,’” said Mark Hamrick, senior economic analyst at Bankrate.com.

“They want to take their benchmark rate into restrictive territory and hold it there for longer awaiting what Chairman Jerome Powell has said must be ‘compelling evidence that inflation is moving down,’” he said. “We remain far from that destination.”

The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the rates consumers see every day on things such as private student loans and credit cards.

The upcoming rate hike will correspond with a rise in the prime rate and immediately send financing costs higher for many types of consumer loans.

“Any time consumers borrow, they are dependent on interest rates,” whether that’s for “housing, cars or appliances,” said Tomas Philipson, a professor of public policy studies at the University of Chicago and former acting chair of the White House Council of Economic Advisers.

What a rate hike could mean for you

Here’s a breakdown of some of the major ways a rate increase could impact you, in terms of how it may affect your credit card, car loan, mortgage, student debt and savings deposits.

1. Credit cards

Since most credit cards have a variable rate, there’s a direct connection to the Fed’s benchmark. As the federal funds rate rises, the prime rate does as well, and credit card rates follow suit.

Annual percentage rates are currently near 18%, on average, which is an all-time record, according to Ted Rossman, a senior industry analyst at CreditCards.com.

Further, nearly half of credit cardholders carry credit card debt from month to month, according to a Bankrate.com report.

“Credit card debt is easy to get into and hard to get out of,” Rossman said. “High inflation and rising interest rates are making it even harder.”

2. Mortgages

Adjustable-rate mortgages and home equity lines of credit are also pegged to the prime rate, but 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy. Still, anyone shopping for a new home has lost considerable purchasing power, in part because of inflation and the Fed’s policy moves.

Along with the central bank’s vow to stay tough on inflation, the average interest rate on the 30-year fixed-rate mortgage hit 6% for the first time since the Great Recession, double what it was one year ago, according to the latest data from the Mortgage Bankers Association. 

As a result, homebuyers’ demand for mortgages has fallen by nearly a third since last year, and fewer borrowers could benefit from a refinance.

3. Auto loans

Even though auto loans are fixed, payments are getting bigger because the price for all cars is rising along with the interest rates on new loans, so if you are planning to buy a car, you’ll shell out more in the months ahead.

The Fed’s next move could push up the average interest rate on a new car loan past 6%, although consumers with higher credit scores may be able to secure better loan terms.

“Auto purchases are large-ticket items where interest rates matter,” said Ivan Drury, Edmunds’ director of insights. “They can make or break a deal, and rapidly rising interest rates could easily push many consumers past their comfort zone for monthly payments.”

4. Student loans

The interest rate on federal student loans taken out for the 2022-2023 academic year already rose to 4.99%, up from 3.73% last year and 2.75% in 2020-2021. It won’t budge until next summer: Congress sets the rate for federal student loans each May for the upcoming academic year based on the 10-year Treasury rate. That new rate goes into effect in July.

Private student loans may have a fixed rate or a variable rate tied to the Libor, prime or Treasury bill rates — and that means that, as the Fed raises rates, those borrowers will also pay more in interest. How much more, however, will vary with the benchmark.

5. Savings accounts

On the upside, the interest rates on savings accounts are on the rise after consecutive rate hikes.

While the Fed has no direct influence on deposit rates, they tend to be correlated to changes in the target federal funds rate, and the savings account rates at some of the largest retail banks, which have been near rock bottom during most of the Covid pandemic, are currently up to 0.13%, on average.

Thanks, in part, to lower overhead expenses, top-yielding online savings account rates are as high as 2.5%, much higher than the average rate from a traditional, brick-and-mortar bank.

As the central bank continues its rate-hiking cycle, these yields will continue to rise, as well. Still, any money earning less than the rate of inflation loses purchasing power over time. 

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