Americans should prepare their finances for even higher interest rates this year as the Federal Reserve continues its fight against inflation.
Although the Fed has increased its benchmark short-term fed funds rate by 3% this year, with the last three rate hikes at a whopping 75 basis points each, consumer inflation continues to linger near a 40-year high.
With inflation still at the highest level in a generation, the Fed’s policy-making arm is expected to deliver a fourth consecutive mega three-quarters of a percentage point interest rate hike in its benchmark rate to a 3.75% to 4% target range, when it concludes its policy-making meeting on Wednesday.
It also is expected to telegraph more rate hikes to come as it focuses on combating inflation, so consumers should expect their costs to head even higher and job losses to mount as economic growth slows.
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Although the Fed doesn’t directly control consumer interest rates, its rate increases ripple through the economy and ultimately, hit businesses and consumers and slow demand and inflation.
“Given the environment of rising rates and a slowing economy, the financial steps for households to take are boosting emergency savings, paying down high-cost debt, and maintaining contributions into, and a long-term perspective on, retirement accounts,” Greg McBride, Bankrate chief financial analyst, said.
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The Fed’s expected to raise rates Wednesday by 75 basis points, which would mark the fourth consecutive increase of that size.
And likely that won’t be the end. The Fed’s year end median fed funds forecast is 4.4% and 4.6% next year before heading lower, according to its economic projections. That means there’s likely another rate increase coming at the Fed meeting in December.
Economists generally expect the Fed to slow its rate hikes in December with a half-point rise to get inflation closer to its 2% target, but another 0.75% hike isn’t out of the question. Deutsche Bank analysts, for now, expect a fifth consecutive supersized 0.75% rate increase in December.
In September, overall annual inflation dipped to an 8.2% pace from August’s 8.3%, but the core rate without the volatile food and energy sectors rose 6.6%, from 6.3% the prior month and the largest increase since August 1982. Both topped economists’ mean forecast and unleashed worries that inflation’s getting entrenched in areas that’ll be harder to control if the Fed doesn’t act faster.
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Homeowners with existing fixed-rate mortgages won’t see any changes. But recent and prospective homebuyers are being socked by higher rates that take into account projected Fed increases through 2022.
“The speed at which mortgage rates have risen is more destabilizing than the actual level of rates,” Yelena Maleyev, KPMG economist, said. “We have seen mortgage rates higher than 7% before, but we never have seen rates double in a matter of months. “
The average rate for a 30-year fixed-rate mortgage in the week ended Oct. 21 was 7.16%, the highest rate since 2001, according to Mortgage Bankers Association (MBA).
That’s dampened borrower demand for both mortgage purchases and refinances. For the week ending Oct. 21, mortgage applications fell 1.7% to the slowest pace since 1997, MBA said. Refinance applications were essentially unchanged, but purchase applications declined 2% to the slowest pace since 2015 and more than 40% behind last year’s clip, it said.
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To put into perspective just how much rising rates can impact borrowers getting a new loan, consider the average 30-year, fixed mortgage rate on December 30 was 3.11%, 4.05 percentage points lower than the latest average of 7.16% on Oct. 21. On a $300,000 loan, a rate of 3.11% results in a monthly payment of about $1,283.
On that same $300,000 loan, a rate of 7.16% results in a monthly payment of $2,028. That’s an extra $745 a month, an extra $8,940 a year, and an extra $268,200 over the 30-year life of the loan.
The dual fear of higher rates and recession (or stagflation) has pressured stocks, but now more market strategists are split on whether they think stocks have another low in them this year.
The S&P 500 officially fell earlier this summer into a bear market, which means the index is down at least 20% from its record high in January and had climbed back on hopes the Fed’s aggressive rate hikes would ease. September’s still hot consumer inflation report extinguished those hopes briefly, but now with a crumbling housing market and slowing labor market, some think the Fed will slow the pace of rate hikes and give stocks a chance to bounce back.
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Higher rates make borrowing and business investment more expensive and cools consumer spending, which cuts into corporate profits. But so far, some note earnings haven’t been hit as bad as some would have thought.
Morgan Stanley Chief Equity Strategist Mike Wilson noted S&P 500 earnings had so far topped analysts’ expectations by 5.8%, in-line with the historical average beat rate of about 5%.
Credit card interest rates are at the highest since mid-1990s and are notoriously among the highest ones you’ll pay with annual percentage rates already near record highs, but they’re going even higher. That means your debt is going to keep getting more expensive unless you act now.
You should immediately shop for a new credit card that offers a lower rate, experts say.
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“A 0% balance transfer credit card may be your best weapon in the battle against credit card debt and rising interest rates,” LendingTree chief credit analyst Matt Schulz said. But make sure to use that to pay off as much of the debt you move to that card as you can and not to charge anymore on it.
You also can call your card issuer to request a lower rate on your cards.
“It can be scary to pick up the phone and negotiate with a big bank, but data shows that 70% of those who ask for a lower interest rate on their credit card in the past year got one,” he said.
Fed rate increases trickle down to new auto loans, but the toll should be less painful. Typically, the cost of a quarter-point increase in rates on a $25,000 loan is just a few dollars extra per month, experts say.
Even so, new auto loan rates in the third quarter rose to 5.7%, the highest since 2019, according to Edmunds.com. The average amount financed for new vehicles also climbed to a record high $41,347 from $40,602 in the second quarter and $38,315 a year ago, it said.
Meanwhile, a record 14.3% of consumers who financed a new vehicle purchase committed to a monthly payment of $1,000 or more, compared to 12.2% the prior quarter and 8.3% a year earlier, Edmunds.com reported.
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As Fed rates rise, banks will be able to charge a little more for loans, giving them more profit margin to pay a higher rate on customer deposits.
“For savers, high-yield savings accounts and certificates of deposit are at levels last seen in 2009,” McBride said.
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If investors are looking to collect as much yield as they can on their savings, look online. Online rates as of Oct. 27 ranged from 1.5% at the low for a savings account with no minimum to as high as about 4% for a 5-year CD with a $1,500 minimum deposit. That contrasts with brick-and-mortar rates of 0.21% to 0.83%, respectively.
“Long term cash returns are rebounding as the era of low rates…starts to reverse,” Bank of America analysts said in September. “We expect positive returns for the foreseeable future with Fed funds expected to touch 4.25% by early next year. Holding cash is becoming more attractive and it allows investors to build a war chest for when the market finally does bottom.”
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 through Friday morning.