Brace Yourself: The Federal Reserve's Rate Hike and Its Impact on You

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The Federal Reserve is expected to approve a quarter-percentage-point interest rate increase this week, marking the 10th time it has raised its benchmark interest rate over the past year. With borrowing rates already at fresh highs, consumers are paying more to borrow while dealing with a high cost of living, resulting in a financial squeeze for many households. In this article, we'll break down how the Fed's moves have been affecting your monthly expenses and savings.

With the rapid pace of interest rate hikes, households are feeling the pinch. Real average hourly earnings have declined by 0.7% compared to a year ago, according to the U.S. Bureau of Labor Statistics. This decline in real wages, combined with the rising cost of living, has forced many people to rely on credit, just as interest rates have been rising at their fastest pace in decades.

Here's a breakdown of how increases in the benchmark rate have been affecting the rates consumers pay on the most common types of debt:

Credit card rates now exceed 20%: Most credit cards come with a variable rate directly connected to the Fed's benchmark rate. As a result, the average credit card rate now exceeds 20%, an all-time high. This is particularly concerning as nearly half of credit card holders carry debt from month to month.

Mortgage rates now average around 6.5%: Though 15-year and 30-year mortgage rates are fixed and tied to Treasury yields and the economy, prospective homebuyers have lost considerable purchasing power due to inflation and the Fed's policy moves. The average rate for a 30-year fixed-rate mortgage currently sits at 6.48%. Homebuyers are paying significantly more than they would have a year ago.

Auto loan rates rise to over 6.5%: Despite being fixed, auto loan payments are increasing due to rising car prices and interest rates on new loans. The average rate on a five-year new car loan is now 6.58%. More borrowers are struggling to keep up with the higher cost and are falling behind on their monthly payments.

Federal student loan rates near 5%: Federal student loan rates are fixed, so most borrowers aren't immediately affected by rate hikes. However, the interest rate for loans taken out for the 2022-23 academic year has already risen to 4.99%. Rates for loans disbursed after July 1 will likely be even higher. Private student loans, which typically have variable rates tied to various benchmarks, will see borrowers paying more in interest as the Fed raises rates.

Deposit rates at some banks reach 4.5%: While the Fed has no direct influence on deposit rates, yields tend to be correlated to changes in the target federal funds rate. The average savings account rates at some of the largest retail banks have increased to 0.39%, while top-yielding online savings account rates are as high as 4.5%. However, if this is the Fed's last increase for a while, deposit rate hikes are likely to slow down.

The Federal Reserve's anticipated rate hike will have an impact on your borrowing costs and savings. The impending rate hike could also have implications for the housing market, especially if long-term rates also increase. Higher mortgage rates may discourage potential homebuyers, leading to a slowdown in demand and potentially easing the recent surge in home prices. However, this effect might be partially offset by persistent supply constraints, as new construction struggles to keep up with demand due to labor shortages, rising material costs, and regulatory hurdles. Additionally, existing homeowners may be less inclined to sell, as they might be reluctant to give up their current low-rate mortgages for higher-rate loans on their next property. In the short term, this scenario could lead to a more balanced housing market, but the long-term impact remains uncertain as various factors continue to shape the future of real estate. Prospective homebuyers and sellers should closely monitor the situation and be prepared to adapt their strategies in response to the evolving market conditions.

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