Three Ways Fed Rate Hikes Will Impact Your Wallet
The Federal Reserve recently delivered the largest interest rate hike since 1994 in an effort to combat inflation that turned out to be not so transitory.
Economists and policy wonks continue to debate the effectiveness of these rate hikes in the face of historically high inflation, but what do they mean for you? Should you care about rising interest rates?
Here are three ways Fed rate hikes will impact your wallet.
Your Credit Card Bill Will Go Up
When the Federal Reserve raises its rates, credit card interest rates rise right along with them. That’s not good news for American consumers who are turning to credit cards to make ends meet.
Revolving credit, primarily reflecting credit card debt, rose by $17.8 billion in April. That was up a sizzling 19.6%. This follows on the heels of a record 29% gain in March. Revolving debt now stands at $1.103 trillion, just slightly above the pre-pandemic record.
Average annual percentage rates (APR) currently stand at 16.8, with many companies already charging in the 20% range. Analysts say the average interest rate may well rise above 18% by the end of the year, breaking the record high of 17.87% set in April 2019. With every Federal Reserve interest rate increase, the cost of borrowing goes up, putting a further squeeze on American consumers.
According to one financial consultant, if you budgeted $397 a month to pay off $15,000 over 60 months on a credit card with a 19.9% APR, you would need to up your payments to $423 a month to clear the balance in the same amount of time.
Adding to the pain, credit card companies may up minimum payments as interest rates rise.
It Will Cost You More to Buy a House
Like credit card rates, mortgage rates will follow Fed interest rates higher.
Mortgage rates are extremely sensitive to Federal Reserve manipulation and we’ve already seen a hefty increase in the cost of borrowing to buy a house.
The average 30-year fixed mortgage rate has spiked to 6.1%. It’s the first time we’ve seen mortgage rates over 6% since the crash of 2008. Until mid-April mortgage rates were in the 4% to 5% range. Just one month ago, rates were 5.49%. At the peak of the pandemic, rates were in the 2.6% range.
We’re seeing the impact of rising mortgage rates on the housing market. Existing home sales tumbled to a two-year low in May.
Rising mortgage rates also close the door to a potential source of cash for American homeowners. Refinancing become a less viable option as borrowing costs rise.
Refinancing not only provides a lump sum of cash to spend but also lowers mortgage payments, taking some strain off the monthly budget.
There was a wave of refinancing in 2019 after the Fed’s monetary U-turn started pushing mortgage rates lower. But over the last several months, the refi market has collapsed.
Finally, as higher mortgage rates depress the housing market, home values will begin to fall. This unwinds the wealth effect of loose monetary policy.
And don’t think you’ll be unaffected if you rent. Rising home prices also drive rents higher. As the cost of buying a house rises, more people are priced out of the market. That increases the demand for rentals, driving up prices. On top of that, owners paying more for rental property will ultimately pass those costs on to their tenants.
The Recession Risk Will Rise
The Federal Reserve created a massive economic bubble with its extraordinarily loose monetary policy. As it tries to tighten that policy, it will begin to pop those bubbles. That means the likelihood of a recession is on the rise.
In simple terms, this economy was built on easy money and debt. Taking away the easy money will pop the bubble and collapse the house of cards economy.
Nevertheless, after last week’s FOMC meeting, Federal Reserve Chairman Jerome Powell claimed that a “soft landing” was still possible. In other words, he thinks the central bank can slay red-hot inflation without tipping the economy into a recession.
Economist Daniel Lacalle said this is “impossible.”
After more than a decade of chained stimulus packages and extremely low rates, with trillions of dollars of monetary stimulus fueling elevated asset valuations and incentivizing an enormous leveraged bet on risk, the idea of a controlled explosion or a ‘soft landing” is impossible.”
In fact, the modest rate increases delivered by the Fed so far may have already tipped the US economy into a recession.
The Atlanta Fed has revised its Q2 GDP growth projection to — zero. That follows on the heels of a -1.5 GDP print in the first quarter. For the last several months, sanguine pundits pointed to “strong” retail sales as proof the consumer remained healthy. But retail sales unexpectedly tanked in May. Consumer sentiment is at historic lows. Stocks have plunged into a bear market.
Powell and other pundits point to a strong labor market as a sign the economy is strong enough to handle rate hikes. But employment is a lagging indicator and it is starting to look shaky as well. Hiring slowed in five out of eight sectors in May.
Federal Reserve monetary policy may seem wonkish and irrelevant to your daily life, but it impacts your wallet in many ways. You would be wise to prepare accordingly.