How will your credit cards, car and home loans change with the rise in interest rates?
On March 16, the Federal Reserve announced it would raise interest rates for the first time since 2018. After inflation reached a 40-year high this February, officials are hoping that the small spike in interest rates might help stabilize the economy.
The federal reserve decided to “raise the target range for the federal funds rate to 0.25 to 0.50 percent and anticipates that ongoing increases in the target range will be appropriate,” according to a March 16 statement.
The Fed is the central bank of the U.S. and it promotes the “effective operation of the U.S. economy and, more generally, the public interest,” according to its website.
One of the bank’s responsibilities is to moderate long-term interest rates for the U.S. economy.
“The objective is to achieve price stability while also sustaining a strong labor market and that is our overall objective,” Federal Reserve Chair Pro Tempore Jerome Powell said during a news conference on March 16. “But we do feel the economy is very strong and well positioned to withstand tighter monetary policy. “
So how does raising interest rates work? It’s pretty simple, according to The New York Times: Higher borrowing rates slow down inflation by tempering demand.
“Higher rates effectively pour cold water on the economy,” the outlet reported.
For Charles Calomiris, a professor of financial institutions at Columbia Business School, the spike is long overdue.
“The Fed is very far behind the curve. Inflation is accelerating and the Fed’s slow response likely will make inflation accelerate further,” Calomiris told McClatchy News in a statement. “Rates need to be much higher.”
But how will the change affect Americans’ wallets? Here’s what experts say.
Higher rates on credit cards, home and car loans
Banks use the federal interest rates as a baseline to decide where to set their own rates that they offer to customers, The Hill reported.
“That means if you have a credit card, auto loan or line of credit with a variable rate, that interest rate is likely to get higher as the year continues,” according to The Hill.
Similarly, home buyers will probably see interest rates on their mortgages rise throughout the year, the news outlet reported.
However, the change in rates will only affect accounts with variable rates. Loans with fixed interest rates, such as federal student loans, won’t be affected by the hike, Forbes reported.
“Now is the time to aggressively pay down high-cost credit cards,” Bankrate Chief Financial Analyst Greg McBride told Forbes.
Changes in stock market, savings accounts and wages
Higher federal interest rates may also result in lower stock market prices, the New York Times reported.
Raised interest rates may eventually trickle down to people with savings in the bank, according to NPR. But the pandemic has already encouraged more people to hold on to their savings, so banks might be slow to pass these benefits along to customers.
And for those who switched jobs or negotiated a better salary before the rates spiked, they might notice a rise in their wages if inflation lessens as planned, The Hill reported.
During the news conference, Powell said that the Fed will “be looking at evolving conditions” to consider further increases later this year.
Powell said he still expects inflation to begin to come down in the second half of the year.
“It’s clearly time to raise interest rates,” Powell added.
“As I looked around the table at today’s meeting, I saw a committee that’s acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that,” he said.
This story was originally published March 16, 2022 at 2:32 PM with the headline "How will your credit cards, car and home loans change with the rise in interest rates?."
