Fed rate hikes have hit consumers hard. Here’s what that means for you.


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  • The Fed raised its key rate again this month by 75 basis points.
  • More rate hikes are also expected this year as the Fed battles soaring inflation.
  • Consumers should prepare by locking in fixed rates, refinancing and paying off high interest debt.

Americans braced for higher borrowing costs as the Federal Reserve began a cycle of raising interest rates to counter soaring inflation.

Investors should expect these higher costs to be even higher.

The Fed’s policy-making committee on Wednesday raised its short-term federal funds rate by 75 basis points, as expected, after 12-month consumer inflation in June accelerated to 9 .1% against 8.6% in May. The move brings the federal funds target range to 2.25% and 2.5%.

Last month, the Fed also raised rates by 75 basis points, which was the biggest one-time increase since 1994, to a range of 1.5% to 1.75%.

Although the Fed does not directly control consumer interest rates, its rate increases ripple through the economy and ultimately hurt businesses and consumers and dampen demand and inflation.

“Two three-quarter percentage point hikes in a row – with more rate hikes to come – means a summer of discontent for borrowers with credit card debt, home equity lines of credit or other variable rate debt that will see rates rise in large chunks over a short period of time,” said Greg McBride, chief financial analyst at Bankrate.

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How high will interest rates go?

The Fed is widely expected to raise rates at every meeting for the rest of the year to bring inflation closer to its 2% target.

Hikes, however, can get smaller. ING’s chief international economist, James Knightley, expects increases of just 50 basis points in September and November with a final quarter point in December.

Deutsche Bank economists are also forecasting a cut to 50 basis points in September, but said risks are weighted towards a 75 basis point increase with only two inflation releases scheduled between July and September meetings. September to assess the improvement in inflation trends.

How does this affect my home buying plans?

Homeowners with existing fixed rate mortgages will see no change. But recent and potential homebuyers are shocked by higher rates that take into account the Fed’s planned increases through much of 2022.

Rates are at a 10+ year high: June 2009 was the last time the average 30-year fixed mortgage rate was at or above 5.50%, according to LendingTree.

“The housing market is incredibly rate sensitive, as mortgage rates suddenly rise, demand falls again,” said Sam Khater, chief economist at Freddie Mac.

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Demand for mortgages and refinance hit a 22-year low last week, the Mortgage Bankers Association said.

To put into perspective how much rising rates can impact borrowers getting a new loan, consider that the average 30-year fixed mortgage rate as of December 30 was 3.11%, or 2.43 basis points. percentage lower than the last average of 5.54% on July 21. On a $300,000 loan, a rate of 3.11% translates to a monthly payment of about $1,283, said Jacob Channel, senior economist at LendingTree.

This same loan of $300,000 with a rate of 5.54% translates into a monthly payment of $1,711. That’s an additional $428 per month, an additional $5,136 per year and an additional $154,080 over the 30-year life of the loan, he said.

How do higher interest rates affect the stock market?

Usually, technology and growth stocks are the hardest hit by rising interest rates, as they rely more on borrowing to fuel their growth.

But with the twin fears of higher rates and recession (or stagflation), more sectors are affected this time around. The S&P 500 officially fell into a bear market earlier this summer, meaning the index is down at least 20% from its January high.

This prompted investors to buy stocks of companies that make or sell things people need to buy, like energy and consumer staples, regardless of economic conditions.

But a recent uptrend in stocks took the stock market off its lows and major indexes closed higher for two straight weeks on Friday. Some of that optimism stems from better-than-expected forecasts from big business, but market watchers continue to warn that the economy remains anxious.

“Every day, we make headlines about the biggest, best-run companies that are slowing down hiring,” said Mike O’Rourke, chief market strategist at JonesTrading. “The only companies to rave about business in any significant way are the airlines, but they continue to miss earnings estimates. In this new market regime that is sorely lacking in visibility, we believe the pursuit of retrospective earnings is will prove to be a mistake.”

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How do Fed rate hikes affect credit cards?

Credit card interest rates are notoriously some of the highest you’ll pay with annual percentage rates already near record highs, but they go even higher. This means that your debt will continue to increase this year unless you act now.

You should immediately start shopping for a new credit card that offers a lower rate, experts say.

“These Fed rate hikes don’t just increase APRs on new credit cards,” Matt Schulz, chief credit analyst at LendingTree. “The rate you pay on your current balances also increases, usually within a billing cycle or two. Any rate increase is unwelcome, but given that we’ve seen three already this year and there are almost certainly more to come, this should serve as a wake-up call for consumers.”

Other steps you can take include taking advantage of 0% transfer offers for another card and starting to pay off the principal immediately. Just make sure you don’t add debt to this card and make your payments.

You can also call your card issuer to request a lower rate on your cards.

“Far too few people are doing it, but 70% of those who have done it in the past year have seen at least some reduction,” Schulz said.

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How do Fed rate hikes affect auto loans?

A Fed rate hike on Wednesday should make its way to new auto loans, but the toll should be less painful. Typically, the cost of a quarter-point rate hike on a $25,000 loan is only a few dollars more per month, experts say.

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How does the Fed’s decision affect bank savings interest rates?

As Fed rates rise, banks will be able to charge a bit more for loans, giving them more profit margin to pay a higher rate on customer deposits.

“However, savings account and short-term CD rates will likely rise more than long-term CD rates until there is little or no rate advantage with long-term CDs. .” Ken Tumin, founder of DepositAccounts.com, said. “It’s a condition that already exists with Treasury yields.”

This condition is called an “inverted yield curve,” which signals that the market expects short-term rates to rise sharply relative to long-term rates. It is also considered a sign that a recession is imminent.

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If investors are looking to reap as much return as possible on their savings, look online. Online rates as of May 1 ranged from a low of 0.54% for a savings account to 2.89% for a 5-year CD. This contrasts with brick and mortar rates of 0.13% to 1.03%, respectively.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.

Paul Davidson is USA TODAY’s senior economics correspondent. You can follow him on Twitter @PDavidsonusat.

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