Impact of highest interest rates in 16 years on you

Impact of highest interest rates in 16 years on you

How the Federal Reserve’s Interest Rate Hikes Affect Your Wallet


The Federal Reserve’s recent interest-rate hikes may be affecting your wallet more than you think. The Fed funds rate, set by the Federal Open Market Committee, influences mortgage, credit-card, and auto-loan rates. When the bank hikes rates, it becomes pricier to get a car loan or pay off credit cards.

The War on Inflation and Your Wallet

The Federal Reserve has been waging a war on inflation for over a year. While price growth has been slowing amid the central bank’s interest-rate hikes, these hikes could be hitting your wallet. Michelle Bowman, a Federal Reserve governor, recently indicated that multiple interest-rate hikes might be necessary to bring inflation down to target levels, after 11 hikes in the past 12 meetings.

The Fed Funds Rate and Its Impact

The Fed funds rate, currently at a target range of 5.25% to 5.5%, is the rate at which banks and credit unions borrow and lend excess reserves to one another overnight. While the rate itself is mostly relevant to banks, it serves as a benchmark for most interest rates that matter to consumers and businesses, including mortgage and credit-card rates.

From April 2020 to March 2022, the Fed funds rate was in the 0% to 0.25% range, implemented to stimulate economic growth and inflation after the start of the pandemic. However, as inflation began to take off in 2021, the Fed hiked rates to increase the cost of credit, making loans more expensive. Higher borrowing costs lead to reduced borrowing by banks, consumers, and businesses, resulting in lower money circulation and a cooling of inflation and the economy at large.

Implications for Auto Loans and Credit Cards

Auto loans and credit-card rates are directly influenced by the Fed funds rate. For example, as the Fed hiked rates, auto loans jumped from a pandemic low of 4.6% in October 2021 to a 2023 high of 7.5%. In June, more than 14% of drivers were unable to secure a car loan, as lenders worried about rising balances and higher delinquency rates. Similarly, credit-card rates have increased roughly 6% since January 2022, costing credit-card users an estimated $1.72 billion in additional interest charges over the next year.

Treasury Yields and the Housing Market

The Fed funds rate also affects Treasury yields, which serve as a basis for other interest rates. The two-year Treasury yield closely aligns with the Fed funds rate, while the 10-year Treasury yield has a relatively similar pattern. These yields influence mortgage rates, with a typical movement in line with shifts in 10-year Treasury yields. Consequently, a rise in the Fed funds rate indirectly pushes mortgage rates up. As a result, homebuyers face increased costs, with a WalletHub analysis finding that those with a 30-year fixed-rate mortgage would pay $11,160 more over the course of the loan than if they secured the loan before July.

Other Effects on Savings and Corporations

Certificate-of-deposit rates, which are closely tied to the Fed funds rate, have also increased as the Fed hikes rates. Additionally, large corporations are directly affected by higher interest rates, as the cost of borrowing money follows the Fed funds rate. The yield on corporate bonds, issued to raise financing, has mirrored the dips and spikes of the Fed funds rate. While higher rates can provide investors with greater returns, businesses may curtail investments in their operations due to higher borrowing costs.

In conclusion, the Federal Reserve’s decision to hike rates has major effects on paying off credit-card debt, buying a home, and purchasing a new car. While the impacts may not yet be evident at the grocery checkout, it is essential to understand how these rate hikes can affect your financial decisions and overall purchasing power.