5 ways the Fed’s interest rate hike will affect America’s wallet

(The Hill) – The Federal Reserve is showing no sign of letting up in its aggressive fight to fight rising prices, tightening the purse as it hikes interest rates at the fastest pace in decades to get a handle on red-hot inflation.

The central bank bumped its benchmark interest rate range on Wednesday by another 75 basis points. The Fed raised rates by the same amount last month in a bid to reduce the cost of hikes, marking its first big rate hike in nearly three decades.

Raising rates is the Fed’s primary tool to combat rising inflation as it seeks to reduce demand by making it harder for consumers to borrow. But the Fed’s actions in recent months have raised concerns among some economists about a looming recession.

Here are five ways rising prices will affect Americans.

Higher mortgage rates

Americans have seen higher mortgage rates as financial markets have tried to anticipate the Fed’s response to rising inflation.

“The effect of the 0.75% rate increase on mortgage and credit card interest rates seems to have been baked in – both have been rising in recent months and that is the most obvious way the rate increase is affecting households,” Josh Bivens, director of research at Economic Policy. Institute, he said.

U.S. mortgage rates have risen sharply in recent months, adding more hurdles for would-be homebuyers struggling to break even in a housing market where prices have soared during the pandemic.

Michael Neal, principal research associate for the Housing Finance Policy Center at the Urban Institute, said mortgage rates have been “rising since the end of last year,” partly reflecting actions taken by the central bank.

Neal said higher mortgage rates could discourage people from buying homes, as well as homeowners from refinancing.

“You refinance to lower your mortgage rate or you refinance to get your equity. So, refinancing to lower your mortgage rate is basically off the table if, because of federal monetary policy, mortgage rates go up,” Neal said.

“Besides, you still want to take equity,” he added. “But taking equity can be more expensive if interest rates are higher.”

More bang for your buck

Rising interest rates often mean higher credit card rates as the Fed tries to cool demand by making it more expensive for Americans to borrow money.

Consumer price data released by the Labor Department showed inflation surged last month, rising to 1.3 percent in June and 9.1 percent annually, the highest year-on-year increase since 1981.

Experts hope the new increase will ease pressure on prices by making Americans spend more. But, on the other hand, they say Americans will also see incentives to save money.

“If you have money in a money market fund, that price goes up automatically,” said David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution.

“Some banks have increased the rates that they pay on savings accounts and [certificates of deposit, or CDs], some don’t. But over time, people’s savings rates will increase,” Wessel added.

Car loans are more expensive

Experts name auto loans among a list of debts that consumers are likely to pay more after the Fed’s interest rate hike.

“The most immediate effect of a short-term move like this is on the rates people pay on their car loans, which have risen by about a percentage point in the last seven months,” Wessel said.

“A big increase means they pay more,” he added. “Of course, if you have a small loan, it doesn’t matter, if you have a large loan it is very important.”

Data released by Cox Automotive and Moody’s Analytics’ Vehicle Affordability Index (VAI) in June showed that the estimated typical monthly payment rose to $712 the previous month.

That figure is a high watermark, the report found, which also said new vehicle affordability has taken a hit, as “rising interest rates and vehicle prices outpace income growth.”

Unemployment may rise

High interest rates can lead to rising unemployment in the coming months, experts say, underlining one of the most difficult challenges facing the Fed in its efforts to tackle climbing inflation.

“If higher interest rates lead to less spending by both households and businesses, this could reduce the pace of economic growth and soften the labor market – perhaps even putting some upward pressure on the unemployment rate,” said Bivens.

The labor market has so far remained strong, adding more than 370,000 jobs last month, with the unemployment rate low at just 3.6 percent. However, when the Fed raises interest rates to lower inflation, layoffs also rise.

“The Fed knows basically, they don’t say this, but basically, they think unemployment is too low,” Wessel said. “And that causes prices, wages to go up too much.”

“So, they’re trying to raise unemployment a little bit, and the reason people are worried about a recession is that it’s very difficult to do a little bit. Chances are you’re going to overdo it or overdo it,” he added.

Ask for a raise soon

With the Fed expected to keep its foot on the gas pedal in the coming months, now may be the best time to ask for a pay boost.

“Now, there is a lot of demand for workers and a lot of jobs that are not filled. Therefore, it is a good time to ask for a raise,” said Wessel. “If the Fed succeeds in slowing demand in the economy and employers start to worry about recession, then that can change. “

Biven also warned of potential consequences if the Fed is too aggressive in raising rates.

“If this happens, some people will lose their jobs, others will lose work hours, and millions will find it harder to raise wages from their employers,” Bivens said.

“This is a huge potential macroeconomic impact, and it’s the biggest potential damage that higher rates can do to ordinary households.”

Sylvan Lane contributed.

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