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While inflation may be slowing, Americans are groaning under the direct and indirect impact of the Fed increasing the interest rate.
The US Federal Reserve (Fed) has continued raising the interest rate and on Wednesday increased the rate by another 0.25 percentage point, causing worry about the potential impact. The apex agency has been trying to stem a stubborn rise in inflation and has been increasing the rate consistently. The recent increase is the 10th in about a year and is the quickest succession of Fed rate hikes since the early ‘80s.
As the rate hike campaign seems to be working, the Fed is now considering pausing or completely stopping the rate hike. Although the agency has yet to announce exactly when it will do this, the idea might be valid if the aim of the hike is finally achieved. However, the hike has impacted the general public.
Impact of the Fed’s Rate Hike
The federal interest rate is exclusively under the Federal Reserve’s control. The Fed essentially decides how banks lend and borrow funds among themselves. While the Fed rate is not the rate customers pay the banks, consumers feel a ripple effect. This effect affects credit systems, including credit cards, loans, and savings accounts.
Unfortunately for users, credit cards tie in with the Fed’s rate since the cards use a variable annual percentage rate (APR). Since this rate is flexible, it is easily influenced by the federal rate. While it may not immediately take effect, it may align in a maximum of two billing cycles.
This alignment causes problems for users as it spikes annual rates. At the moment, credit card users are stuck with increasing debt as rates have risen more than 20%. According to a survey by personal finance site WalletHub, consumers will spend an additional $1.7 billion over the next year. It also says people would have paid extra interest charges of $31.7 billion in the same period and that the Fed’s recent rate hikes would have cost $33.4 billion.
Fed Rate Impact on Student, Auto, and Home Loans
Most student, auto, and home loans are fixed, meaning borrowers do not quickly feel the brunt. In fact, people who have already taken these loans may already be safe. However, new borrowers may have much to worry about. For instance, federal student loans for the academic year ending in 2023 rose to 4.99%. It is expected that any new loans taken for the year ending in 2024 will be higher because of the hike.
For auto loans, new buyers have to worry about an increased rate. Consumer financial services company Bankrate puts the five-year new car loan at 6.58%. As the Fed hikes the rate, new buyers will likely pay more.
The same problem will affect new borrowers for mortgage rates tied to home loans. In addition to inflation, new homeowners would likely have to spend more money for the same or relatively cheaper homes. While mortgage rates largely depend on the economy and Treasury yields, new homeowners will likely feel the brunt of the Fed’s policy.
Savings Accounts and CDs
Savings accounts are not directly tied to Fed rates. However, deposit rates used by savings accounts and CDs may be directly influenced. Consumers may still feel the impact of the Fed interest rate, essentially leaving people with a lot less cash. Bankrate puts online savings accounts at 4.5%, while DepositAccounts.com puts 1-year online Certificates of Deposits at 5%.
According to the Bankrate survey, 27% more people are now upset at the recent rate than in March. 71% are spending more on monthly groceries because of inflation, and about 4x more people between 18 and 29 years old are worried that the Fed rate hike will impact their jobs.