How does the Fed interest rate hike affect mortgages, student loans and credit cards?
The Federal Reserve has introduced yet another increase in interest rates to help curb inflation. We take a look at how this could affect consumers...
The Federal Reserve has announced yet another interest rate increase, the eighth hike of base rates since the start of 2022. The move was confirmed on Wednesday as the Fed outlined the next stage of its effort to curb high inflation.
A 0.25-percentage point increase will be introduced by the Fed, a relatively small increase but one that will heighten the pain on borrowers. Many had hoped that the Fed would begin lowering interest rates this year in response to the cooling of inflationary pressures recorded in late 2022.
The federal funds rate is set by the Fed and is used as a benchmark with which banks borrow and lend to each other. It is not the exact rate that customers experience, but the two are closely linked.
The Fed is hoping that the interest rate raises will cool the economy by discouraging borrowing. However for those who already have some kind of credit mechanism or loan, this strategy has been costly. We take a look at the consequences for some of the most common types of borrowers...
Typical mortgage rates in the United States are not specifically tied to the federal funds rate, rather they track the yield on 10-year Treasury Bonds. The value of the bonds is related to the Fed’s economic outlook and further interest rate hikes does not convey confidence from the central bank.
For the week ending 26 January 2023 average mortgage rates actually fell slightly, from 7% to 6.13%. However this is far higher than the figure of 3.55% recorded at the same point in 2021. Homeowners with a mortgage will likely be facing much larger repayments than they had originally signed up for, as a result of interest rate hikes.
There’s better news for student loan borrowers because existing federal student loans are subject to a fixed rate of interest set by the government. They are tied to the rate of 3.73%.
If you have not yet taken out a federal student loan but will have one disbursed after 1 July 2023, you will be subject to a higher rate of 4.99%. This rate will remain fixed.
Anyone who took out a private student loan will likely be paying more, regardless of whether they went for a fixed- or variable-rate loan. Both are linked to the federal funds rate so the interest rates will increase accordingly.
Of all the forms of borrowing available to consumers, credit cards are perhaps the kind most sensitive to changes in interest rates. The alterations are done by each bank individually and often vary across different types of cards.
However once an interest rate hike is introduced, borrowers will usually see their own interest rate rise within one or two billing cycles.
To be able to comment you must be registered and logged in. Forgot password?