What the Fed’s interest rate hike means for you

The Federal Reserve is expected to raise its benchmark short-term rate by a quarter of a percentage point on Wednesday.

“Raising the interest rate is all about creating an incentive to save,” said Laura Veldkamp, ​​professor of finance and economics at Columbia University. “It’s basically a deterrent to consumer spending. When an economy is overheating, raising the interest rate is a way to step back and say, “I’m going to hang in there and postpone this spending.”

Below is a guide to when these changes may occur and a few things to watch out for as more interest rate increases are expected this year.

Mortgages

The way mortgage prices are set is largely based on the yield of the 10-year US government bond, also known as the Treasury bill. This rate serves as a benchmark for all different types of loans, including mortgages. When the Fed raises rates, it pushes the yield on the Treasury bond higher. This in turn will push mortgage rates higher.

While the Fed has signaled higher rates, the 10-year yield has already risen. This in turn pushed the average rate over a 30-year fixed rate mortgage at 3.85% the week of March 9, and a year ago it was 3.05%, according to Freddie Mac.

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Over the past two years, low rates and low inventory have fueled a white-hot housing market, with soaring home values ​​leading to fierce bidding wars. From January, the median selling price for a single-family home was $357,100, up nearly 16% year-over-year, according to the National Association of Realtors.

The prospect of higher rates has already started to reduce demand for refinancing, and rising mortgage rates will likely create even more difficulties for those looking.

“We’re likely to see some decline, or at least a slowdown,” Professor Veldkamp said of mortgage lending volume.

High Yield Savings Accounts and Certificates of Deposit

The interest rates offered on savings accounts and many certificates of deposit often change with the federal funds rate. According to the Federal Deposit Insurance Corp., the average annual percentage return on a one-year CD is 0.14%. Goldman Sachs Group Inc..

Marcus account now offers 0.50%. Online banks like Ally Financial Inc. also offer 0.50% for their high yield savings products.

All of these are expected to rise slightly as rates rise, but at the moment banks have little incentive to raise interest on savings accounts. During the pandemic, Americans hoarded money, which led to the highest personal savings rate since World War II, then fell These last months.

“Low interest rates have hurt savers a lot,” said Fernando Martin, assistant vice president at the Federal Reserve Bank of St. Louis. “People were looking for alternative investments and returns, which always involves more risk. As interest rates rise, CDs will go up, which may help savers a bit more.

The Federal Reserve’s primary tool for managing the economy is changing the federal funds rate, which can affect not only borrowing costs for consumers, but also influence broader business decisions, such as the number of people to hire. The WSJ explains how the Fed manipulates this single rate to guide the entire economy. Illustration: Jacob Reynolds

Car loans

When you take out an auto loan, that loan has a fixed interest rate indexed to Treasury yields. This means that rising interest rates should come as no surprise to those who have already secured their fixed rate.

For those looking to buy in the hot auto market, be sure to do the math on vehicle financing.

Also, keep in mind that car dealerships and individual lenders may charge different amounts for your specific new car loan. According to Bankrate.com, the average rate on a new 5-year car loan was 3.98% the week of March 10.

Credit card

An increase in interest rates can sometimes affect the credit card average annual rate, or APR. According to WalletHub’s March report of over 1,500 credit card offers, the average annual percentage rate of charge for those with good credit was 18.98%.

Student loans

For those with federal loans, interest rates have already been set for the 2021-2022 school year.

Each May, the interest rate for federal student loans is set based on the 10-year treasury bill auction. These rates are fixed for the life of the loan. The rate for direct subsidized and unsubsidized undergraduate loans is currently 3.73% until June 2022, according to the US Department of Education. Next year, the rise in rates could impact the loans distributed for the following academic year.

Private education loans could, however, be affected by the rise in interest rates. Private student loans charge either fixed rates, which stay constant, or variable rates, which can go up or down depending on the institution you’re borrowing from or your personal financial situation.

Write to Julia Carpenter at [email protected]

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