Here we go again. The Federal Reserve resumed raising interest rates on Wednesday after taking a break last month and left the door open for yet another before year-end, making the environment worse for borrowers but better for savers.
The Fed raised its short-term benchmark fed funds rate by a quarter percentage point to a target range of 5.25% to 5.50%, the highest level in 22 years and from near 0% early in 2022. In the Fed's announcement, it said “economic activity has been expanding at a moderate pace” – an upgrade from its previous description of “modest” growth. That’s a possible signal that the Fed believes the economy could withstand another rate hike and that sturdy growth may push inflation higher again.
It was the Fed's 11th rate hike in the past year and a half, making this rate hiking cycle one of the fastest since the early 1980s to stymie spending and tame inflation. Inflation is down from the June 2022 peak of 9.1% but at 3% in June, remains well above the Fed's 2% goal.
The 25-basis-point increase will cost consumers another $1.72 billion, bringing the annual cost of the Fed’s recent rate hikes to a whopping $36 billion in total, WalletHub said. At the end of March, total household debt stood at $17.05 trillion, and the share of debt becoming delinquent increased for most debt types, according to the New York Federal Reserve.
On the opposite side, savers (though there may be fewer of them now after inflation's run over the past two years), are cheering. After years of earning nearly 0% on savings deposits, they're finally getting rewarded for their patience. Another increase in the fed funds rate could garner them another 20 to 30 basis points in high-yield online savings accounts, said Ken Tumin, founder of DepositAccounts.com, which tracks depository banking products.
So, if you can, "pay down debt and put money away at the same time, using high-yield savings accounts to your advantage," said LendingTree's chief credit analyst Matt Schulz.
Yes, and "the scariest thing of all for folks with credit card debt is that interest rates are actually rising more quickly than the Fed is forcing them to," Schulz said.
The average annual percentage rate on a currently held credit card including those with carried-over balances was 22.16%, according to the latest data from the Fed. That’s up 5.99 percentage points from the 16.17% rate seen in the first quarter of 2022 and outpacing the 5-percentage-point increase from the Fed over that same period. "That means that the typical interest rate paid by those with credit card debt has grown faster than the Fed has pushed it," Schulz said. "That’s not a good sign."
Meanwhile, the average APR on a new credit card offer is 24.24%, the highest since LendingTree began tracking in 2019.
Consumers have options, though, that'll help them manage their debt, including 0% balance transfer credit cards, "They’re still widely available for those with good credit and can allow you to go up to 21 months without accruing any interest," Schulz said. "That’s a really big deal."
Consumers can also call their credit card companies and ask for an interest rate reduction. More than three-quarters of cardholders who asked for a lower APR for their credit card in the past year got one, according to a report in April from LendingTree. The average reduction was about 6 percentage points, which could save you $500 or more depending on how much you owe, it said.
Homeowners with existing fixed-rate mortgages won’t see any changes. Recent and prospective homebuyers are feeling the higher rates, but notably, mortgage rates have been volatile. Since the start of 2023, the average rate on a 30-year, fixed mortgage reported by Freddie Mac has fallen to as low as 6.09% in early February and climbed as high as 6.96% in mid-July before easing off again to 6.78%, as of July 20.
The Fed influences but doesn’t directly set mortgage rates, so home loan costs may not move significantly in the near term. Other factors, like housing demand and the economic outlook, also affect mortgage rates.
“Ultimately, even if mortgage rates do continue to trend down over the remaining months of 2023, buying a house is likely going to remain difficult," said Jacob Channel, LendingTree senior economist. "This is because prices, though they have fallen in some parts of the country, are still relatively high."
It's important to note that while mortgage rates may not rise significantly, they’re still relatively steep.
For a $350,000 loan at the July 20 rate of 6.78%, borrowers would pay about $2,277 a month. That’s an extra $281 a month, an extra $3,372 a year and an extra $101,600 over the 30-year lifetime of the loan compared with a year ago when rates were 124 basis points lower.
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The average interest rate on newly financed vehicles climbed in June to 7.2%, the highest level since 2007 and up from 5.2% a year earlier, while used vehicle rates soared to 11% from 8.3%, according to car industry data from Edmunds.
Meanwhile, the average monthly payment for a new vehicle hit a record in the three months ended June 30 of $733, up from $678 a year earlier. And a record-high 17.1% of consumers financed a new vehicle with a monthly payment of $1,000 or more, Edmunds said.
“The good news for new car buyers is that automakers have gradually offered more subsidized loan programs as inventory has improved and stabilized," said Jessica Caldwell, Edmunds' executive director of insights. "That should take some of the sting out of rising interest rates for qualified consumers with good credit, with the caveat being a shorter loan term than desired in many cases. All other shoppers will need to tread cautiously."
Stocks took a breather and closed little changed on Wednesday after the Fed raised rates, as expected. The benchmark broad market S&P 500 index dipped fractionally after closing on Tuesday at the highest level since April 2022 while the tech-heavy Nasdaq shed about one-tenth of a percent. The blue-chip Dow gained about two-tenths of a percent on Wednesday to extend its winning streak to 13 consecutive days, the longest rally since 1987.
However, all major indexes were rallying again Thursday morning on hopes that inflation is abating enough a rate hike on Wednesday will be the last from the Fed in this cycle and the economy will avoid recession, especially because the labor market remains strong.
On Wednesday, Fed Chairman Jerome Powell said Fed staff has erased recession from its forecast. A report Thursday morning added fuel to that forecast, showing the economy grew a more-than-expected 2.4% in the three months ended June 30 while inflation eased.
Despite this, some remain skeptical because higher rates make borrowing and business investment more expensive, and they cool consumer spending, which cuts into corporate profits and leads to layoffs. Some economists say this could still happen, albeit closer to 2024 now.
“Recession risk is still elevated, pushed out but not quite eliminated," said Alex Pelle, economist at Mizuho Securities USA. "Economic bears may yet be right that monetary policy lags will eventually have a serious bite."
For savers, yields have risen, particularly on online savings accounts and online 1-year CDs. The average online savings account yield has risen to 4.08% from 3.31%, with the highest at 5.25%. Another quarter-point Fed rate hike will likely move this average up another 20 to 30 basis points, Tumin said.
The average online 1-year CD is yielding 4.89%, with the highest at 5.55%. However, Tumin warns "the high rate is a short timeframe. At maturity, these CDs will likely renew into standard CDs with much lower rates. Many customers will not move their money at maturity," which is what banks bet on.
Those "sleepy savers" who passively keep their money in CDs at big financial institutions where they also have their checking accounts and let them automatically roll over to another low-return CD, "should act now," said Howie Wu, head of product and general manager of CD Valet at Seattle Bank. "The rates they can earn on CDs elsewhere are significantly higher."
Several money market funds now yield between 5.00% and 5.18%, and many more would yield more than 5% after a July Fed rate hike.
The average online 5-year CD yield is 3.93%, down from 4.04% on Jan. 1 but up from 2.89% one year ago.
In comparison, brick-and-mortar bank deposit rates continue to rise at a snail’s pace. The average savings account yield gained only 14 basis points in 2023, rising to 0.42% from 0.28%.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday.
This article originally appeared on USA TODAY: How the July fed rate hike could affect your money, savings and stocks
