Student management

Here’s what will cost more as the Fed raises interest rates

Topline

The Federal Reserve on Wednesday authorized the biggest interest rate hike in 22 years as part of its effort to combat the fastest price hike in more than 40 years, doubling down on a series of rate hikes that are already making a multitude of more expensive debt offers. including some student loans, credit cards and future mortgages.

Highlights

“Now is the time to aggressively pay off high-cost credit cards,” Bankrate chief financial analyst Greg McBride said in emailed comments, pointing out that almost all credit cards come with a match. variable interest rates that fluctuate in parallel with the fed funds rate determined by the Fed.

A few rate hikes alone are unlikely to have a huge effect on small items, including auto finance, but several major banks including Bank of America, Wells Fargo and JPMorgan raised interest rates on Thursday. prime loans, which are used to calculate borrowing costs, at 4%, compared to around 3.25% two years earlier.

Although federal student loans are issued at fixed rates (meaning existing loans will not be affected), private loans, which represent about 8% of the market with some $131 billion in outstanding loans, are often with floating rates that rise after the Fed. hikes.

Mortgage rates have jumped 2 percentage points since the start of the year, from nearly 3.8% to 5.3%, McBride points out, saying the increase should temper the surge in house prices “because more and more potential buyers are overpriced”.

Many mortgage companies are already suffering from a drop in demand, but McBride says the shortage of homes available for sale (still a third of normal levels) should help rising rates weigh too heavily on the housing market .

A bright spot? “The outlook for savers is improving,” McBride says, noting that high-yield savings accounts and certificates of deposit will boost payouts, even though most banks “are likely to be stingy in passing on rates higher”.

crucial quote

“Rising interest rates mean borrowing is more expensive and saving will end up paying more,” McBride says, adding that households should take steps to “stabilize their finances,” including paying off cards expensive credit and other variable rate debt, and strengthening emergency measures. savings. “Both will make you more resilient to rising interest rates and whatever else might come next economically.”

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At the end of their two-day policy meeting on Wednesday afternoon, Fed officials said the central bank would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend. reserves, from 50 basis points to a target range of 0.75% to 1% – a widely expected move after an initial rise of 25 basis points on March 16.

To monitor

On Wednesday, Fed Chairman Jerome Powell ruled out raising the federal funds rate by 75 basis points over the next few months, setting a framework for two more increases of 50 basis points each in upcoming meetings. That said, expectations about the pace and intensity of future rate hikes have become more aggressive amid continued high inflation and criticism that the central bank waited too long to start raising rates. In a note to clients on Friday, Bank of America economist Ethan Harris said the main risk to the economy is if inflation remains high next year. “Risks of recession are low now, but high in 2023 as inflation could force the Fed to hike until it hurts,” he said. Last month’s consumer price index report will be released on May 11, and the Fed’s next policy meeting will end on June 15.

Large number

$15.6 trillion. That’s the amount of US household debt at the end of last year, the highest amount on record, according to the New York Federal Reserve. Although most of it is contained in fixed-rate mortgage debt, the overall figure rose by the largest amount in 14 years, as rapidly rising prices for homes and autos swelled mortgage balances by $258 billion. and auto loans of $181 billion. Credit card balances, on the other hand, rose by $52 billion, while student loan debt actually shrank by $8 billion.

Further reading

Fed authorizes biggest interest rate hike in 22 years to fight inflation amid ‘sharp’ sell-off in stocks (Forbes)

Has inflation peaked? The Fed’s favorite indicator may be saying so, despite another ‘surprising’ reading (Forbes)

Stocks Could Plunge Another 15% After Fed-Spurred Selloff — Will the Economy Fall into a Recession? (Forbes)