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Fiscal impact of a series of Fed rate hikes

of federal government The Reserve Bank’s move to raise the key rate by half a percentage point on Wednesday put it in the 4.25% to 4.5% range, the highest level in 14 years.

The Fed’s latest rate hike (seventh rate hike this year) will make it even more expensive for consumers and businesses to borrow for homes, cars and other purchases. On the other hand, if you have money to save, you can earn a little more interest on that money.

Wednesday’s rate hike was part of the Fed’s attempt to contain high inflation and was smaller than the previous four consecutive 3/4 percentage point rate hikes. The downward shift reflects, in part, easing inflation and a cooling economy.

As interest rates rise, many economists say they fear a recession is inevitable. That could lead to unemployment that could pose a challenge to households already hard hit by inflation.

Here’s what you should know:

What is driving the increase in rates?

Short answer: inflationOver the past year, US consumer inflation has reached 7.1%. This is his fifth straight month of decline, but it is still painfully high.

The Federal Reserve’s goal is to slow down consumer spending, thereby reducing demand for homes, cars and other goods and services, ultimately cooling the economy and lowering prices.

Federal Reserve Board Jerome Powell He acknowledged that aggressively raising interest rates would cause “some pain” for households, but that it was necessary to keep high inflation in check.

Which consumers are most affected?

Moody’s Analytics analyst Scott Hoyt said anyone who borrows money to make big purchases such as homes, cars and large appliances will be hit hard.

“The new rate will increase monthly payments and costs pretty dramatically,” he said. You will be hit.”

That said, Hoyt points out that household debt payments as a percentage of income, while rising recently, remain relatively low. , many households may not feel that the debt burden will be so large anytime soon.

“I don’t know if interest rates are a top priority for most consumers right now,” Hoyt said. “They seem more concerned about what’s going on with groceries and gas pumps. Charges can be hard for consumers to understand.”

How will this affect my credit card rate?

Even before the Fed’s latest move, credit card borrowing rates have hit their highest level since 1996 and may continue to rise, according to

And prices are still skyrocketing, American We are increasingly relying on credit cards to sustain our spending. His total credit card balance has surpassed $900 billion, a record high, according to the Fed, but that amount isn’t adjusted for inflation.

John Lear, chief economist at research firm Morning Consult, said the firm’s polls suggest more Americans are using up the savings they’ve accumulated during the pandemic and are using credit instead. said there is. Ultimately, higher interest rates could make it harder for these households to pay off their debts.

People who can’t get low-interest credit cards because of their low credit scores are already paying pretty high interest on their balances.

As interest rates rise, zero-percent loans advertised as “buy now, pay later” are also becoming more popular with consumers. However, his 4+ payment long term loans offered by these companies are subject to the same high borrowing rates as credit cards.

For people with home equity lines of credit or other variable rate debt, interest rates will rise by about the same amount as the Fed rate hikes, usually within one or two billing cycles. This is because these rates are based in part on the prime rates of banks following the Fed.

How are savers affected?

Rising returns on high-yield savings accounts and certificates of deposit (CDs) are at levels not seen since 2009. Also, you can now earn more from bonds and other fixed income investments.

Savings, CD, and money market accounts typically don’t track changes in the Fed, but online banks and other banks that offer high-yield savings accounts can be an exception. These institutions typically compete aggressively for depositors. (Catch: Sometimes very high deposits are required.)

In general, banks tend to take advantage of the high interest rate environment to boost profits by charging borrowers higher interest rates, without necessarily offering savers juicer rates.

Will this affect home ownership?

Last week, mortgage buyer Freddie Mac reported that the average benchmark 30-year mortgage rate had fallen to 6.33%. That is, the general mortgage interest rate is still about double what he was a year ago.

Mortgage rates don’t always track the Fed’s benchmark rates. Instead, they tend to track 10-year Treasury yields.

Sales of existing homes have fallen for the ninth straight month. Mortgage costs are too high a hurdle for many Americans who pay a lot for food, gas and other necessities.

Is it easy to find a home if you’re still considering buying?

If you can afford to move forward with your home purchase, you may have the most options in the past year.

What if I want to buy a car?

The average new car loan jumped more than two percentage points in November, from 4.5% to 6.6%, according to the auto site, since the Fed began raising rates in March. Used car loans rose 2.1 points to his 10.2%. The average new car loan term is just under 70 months, and the used car loan term is over 70 months.

However, the most important thing is the monthly payment, which is the basis of most people’s car purchases. New car prices have averaged $61 to $718 since March, according to Edmunds. The average monthly payment for a used car is $565, ​​an increase of $22.

Ivan Drury, Director of Insights at Edmunds, says the average new car price of $47,000 costs $8,436 in interest. This is enough to force many companies out of the car market.

“I think we’re really starting to see that rates are where the Fed wants them to be,” Drury said. “They’re taking away purchasing power so you can’t buy cars anymore. Fewer people will be able to.”

Rate hikes by the Federal Reserve will likely be passed on to car borrowers, but will be slightly offset by subsidies from manufacturers. Drury predicts that new car prices will start to fall next year as demand weakens a bit.

How did rate increases affect cryptocurrencies?

Since the Federal Reserve started raising interest rates, the value of cryptocurrencies like Bitcoin has fallen. So do many tech stocks that were once highly valued.

Higher interest rates mean that safer assets like government bonds have become more attractive to investors as their yields have risen. This makes risky assets like tech stocks and cryptocurrencies less attractive.

Yet Bitcoin continues to suffer from problems separate from economic policy. The collapse of three major crypto companies, most recently his high-profile FTX exchange, has shaken crypto investor confidence.

how is my job

Some economists have argued that layoffs may be necessary to keep prices down. One argument is that a tight labor market will drive wage growth and higher inflation. However, employers in the country continued to actively hire in November.

“Openings continue to outpace hiring, indicating that employers are still struggling to fill vacancies,” said First American economist Odeta Kushi.

Will this affect student loans?

Borrowers taking out new private student loans will have to prepare for more payments as interest rates rise. The current range for federal loans is between about 5% and 7.5%.

That said, as part of emergency measures implemented early in the pandemic, federal student loan payments will be suspended interest-free until the summer of 2023. President Joe Biden also announced loan forgiveness of up to $10,000 for most borrowers and up to $20,000 for Pell grant recipients. This policy is currently being contested in court.

Could rate hikes be undone?

It seems less and less likely that interest rates will go down any time soon. On Wednesday, the Federal Reserve suggested raising interest rates to about 5.1% early next year and keeping them there for the rest of 2023.


APs Business writers Christopher Lugerber of Washington, Tom Krisher of Detroit, and Damien Troise and Ken Sweet of New York contributed to this report.


The Associated Press receives support from the Charles Schwab Foundation for educational and descriptive reports to improve financial literacy. An independent foundation is separate from Charles Schwab and Co. Inc. AP is solely responsible for its journalism. Fiscal impact of a series of Fed rate hikes

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