5 Ways Fed Rate Hikes May Squeeze Your Wallet
The Federal Reserve nudged up interest rates another .25 points last week. Of course, nobody was surprise by the central bank’s move. It was widely expected. Nevertheless, the Fed’s latest policy move has everybody bullish on increasing rates into the future
Of course, nothing has fundamentally changed. As Paul Singer said earlier this month, the financial system is no more sound than it was in 2008. All of this talk about rate hikes will vanish like a vapor if actual economic data continues to point toward a slowdown.
But since everybody is talking rate hikes right now, this is probably a good time to consider just how rising interest rates will effect your wallet.
We tend to think about Federal Reserve policy in macro-economic terms. How will it effect the stock market? What kind of bubbles will it blow up? How will it impact the price of gold? But Fed policy also has a direct effect on the average American. In simplest terms, rising rates mean it will cost you more to pay off credit cards and other loans. That’s not good news for an economy buried in debt.
Here are five ways rising interest rates can put the squeeze on your pocketbook.
Credit card payments
This is probably the most direct way Americans will feel the impact of rising rates. Credit cards rates are tied to the prime rate, which is directly linked to the Fed key rate.
American families have amassed more than $1 trillion in credit card debt. As of the end of 2016, the average credit card debt per American household stood at $8,377. A recent USA Today article highlighted how much even a small rate hike impacts American consumers.
Average credit card rates are 15.07%, according to Bankrate.com. For a $5,000 credit card balance, a quarter point hike is likely to add about $175 in total interest, says Bankrate Chief Economist Greg McBride”
If the Fed were to actually follow through and bump up rates three times a year through 2019, that could mean the addition of more than $525 in total interest annually for the average family.
Looking at the numbers in aggregate reveals the scope of the impact. According to MSNBC, the most recent quarter-percentage-point increase will cost roughly $1.5 billion in extra finance charges this year.
Americans with adjustable rate mortgages will feel an immediate impact. Three quarter-point hikes in 2017 likely would boost the monthly payment on a $200,000 mortgage by $84 a year.
Fixed rate mortgages are also impacted by Fed policy. Analysis in USA Today estimates if the central bank follows through with its projected rate hikes and shrinking its portfolio, it could raise fixed mortgages rates by half a point annually.
Together, the rate hikes and the unwinding of the Fed’s portfolio could increase mortgage rates by half a percentage point a year, says Lynn Fisher, vice president of research and finance for the Mortgage Bankers Association. For that $200,000 mortgage borrower, it could mean shelling out an additional $180 a month by the end of 2019.”
Home equity loans
Rates for home equity lines of credit currently average around 5%. A quarter point increase on a $30,000 credit line boosts the minimum monthly payment by roughly $6 a month, That means three hikes this year would result in an $18 per month increase in payments.
Fed policy will also boost the cost of buying a car, although the impact isn’t as significant. Analysts say three hikes in 2017 would theoretically increase the monthly payment for a new $25,000 car by a total of $9 per year.
Federal student loans are on a fixed rate, so there won’t be an immediate effect on current borrowers, although rising Fed rates could impact future loans. But many students also took out private loans which often have adjustable rates. Fed policy could boost payments for students with these loans.
It’s easy to brush Fed policy off as nothing more than the subject of wonkish debates by economists, but we need to remember that it has real impact on everyday Americans. And that means it’s going to have a real impact on an already shaky US economy.
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