EXPLAINER: How a higher Fed rate could affect your finances

WASHINGTON — Record-low mortgages are long gone. Credit card rates will likely rise. So will the cost of an auto loan. Savers may finally see a noticeable return.

The unusually large three-quarter point hike in its benchmark short-term rate that the Federal Reserve announced Wednesday won’t, by itself, have a huge effect on most Americans’ finances. But combined with earlier rate hikes and additional large increases to come, economists and investors foresee the fastest pace of rate increases since 1989.

The result is increasingly higher borrowing costs as the Fed fights the most painfully high inflation in four decades and ends a decades-long era of historically low rates.

Chair Jerome Powell hopes that by making borrowing more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services and slow inflation.

Yet the risks are high. With inflation likely to stay elevated, the Fed may have to drive borrowing costs even higher than it now expects. A series of higher rates could tip the U.S. economy into recession. That would mean higher unemployment, rising layoffs and continued pressure on stock prices.

How will it affect your finances? These are some of the most common questions being asked about the impacts of the rate hike.

I’m considering buying a house. Will mortgage rates keep going up?

Rates on home loans have soared in the past few months, mostly in anticipation of the Fed’s moves, and will probably keep rising.

Mortgage rates don’t necessarily move up in tandem with the Fed’s rate increases. Sometimes, they even move in the opposite direction. Long-term mortgages tend to track the yield on the 10-year Treasury note, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasurys.

For now, though, faster inflation and strong U.S. economic growth are sending the 10-year Treasury rate up sharply. As a consequence, the national average for a 30-year fixed mortgage has jumped from 3% at the start of the year to well above 5% now.

In part, the jump in mortgage rates reflects expectations that the Fed will keep raising its key rate. But its forthcoming hikes aren’t likely fully priced in yet. If the Fed jacks up its key rate even higher, as expected, the 10-year Treasury yield will go much higher, too, and mortgages will become more expensive.

Will it still be tough to find a house?

If you’re looking to buy a home and are frustrated by the lack of available houses, which has triggered bidding wars and eye-watering prices, that may get a little easier soon.

Economists say that higher mortgage rates will discourage some would-be purchasers. And average home prices, which have been soaring at about a 20% annual rate, could at least rise at a slower pace.

Sales of existing homes have fallen for six straight months. New home sales have also slumped. Those trends are modestly boosting the supply of available properties.

I need a new car. Should I buy one now?

Fed rate hikes can make auto loans more expensive. But other factors also affect these rates, including competition among car makers that can sometimes lower borrowing costs.

Rates for buyers with lower credit ratings are most likely to rise as a result of the Fed’s hikes. Because used vehicle prices, on average, are rising, monthly payments will rise too.

What will happen to my credit card?

For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise by roughly the same amount as the Fed hike, usually within one or two billing cycles. That’s because those rates are based in part on banks’ prime rate, which moves in tandem with the Fed.

Those who don’t qualify for low-rate credit cards might be stuck paying higher interest on their balances. The rates on their cards would rise as the prime rate does.

The Fed’s rate increases have already sent credit card borrowing rates above 20% for the first time in at least four years, according to LendingTree, which has tracked the data since 2018.

How will this affect my savings?

You may earn a bit more, though not likely by very much. And it depends on where your savings, if you have any, are parked.

Savings, certificates of deposit and money market accounts don’t typically track the Fed’s changes. Instead, banks tend to capitalize on a higher-rate environment to try to increase their profits. They do so by imposing higher rates on borrowers, without necessarily offering any juicer rates to savers.

This is particularly true for large banks now. They’ve been flooded with savings as a result of government financial aid and reduced spending by many wealthier Americans during the pandemic. They won’t need to raise savings rates to attract more deposits or CD buyers.

But online banks and others with high-yield savings accounts could be an exception. These accounts are known for aggressively competing for depositors. The only catch is that they typically require significant deposits.

How will the hike influence crypto?

Cryptocurrencies like bitcoin could become a little less attractive to many investors.

While bitcoin prices were mostly unchanged after the Fed’s announcement, crypto prices had declined in the days leading up to the central bank’s move. They dropped by a third in seven days.

Higher interest rates mean that safe assets like bonds and Treasuries become more attractive to investors because their yields are now higher. That, in turn, makes risky assets like technology stocks and cryptocurrencies less attractive.

All that said, bitcoin is suffering from its own problems that are separate from economic policy. Two major crypto firms have failed in the span of a month. The shaken confidence of crypto investors is not being helped by the fact the safest place you can park money now — bonds — seems like a safer move.

Will my student loan payment go up?

Right now, payments on federal student loans are paused until August 31 as part of an emergency measure put into place during the pandemic. Inflation means loan-holders have less disposable income to make payments, but a slowed economy that reduces inflation could bring some relief by fall.

The government may choose to extend the emergency measure deferring payments at the end of summer, depending on the state of the economy. President Joe Biden is also considering some form of loan forgiveness. For those taking out new private student loans, prepare to pay more. Rates vary by lender, but are expected to increase.

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