The Federal Reserve authorized on Wednesday the biggest interest rate hike in 28 years, as part of its effort to combat the quickest surge in prices in four decades. Doubling down on a series of rate increases that’s already making a slew of debt offerings —including some student loans, credit cards and new mortgages— more expensive.
“Now is the time to aggressively pay down high-cost credit cards,” Bankrate Chief Financial Analyst Greg McBride said in emailed comments, pointing out nearly all credit cards come with variable interest rates that fluctuate in tandem with the federal funds rate determined by the Fed.
Fueled by the Fed’s hikes, mortgage rates have surged to the highest level since the Great Recession, climbing from nearly 3.8% at the beginning of the year to more than 6% last week—and pushing the average monthly mortgage payment up by about $600.
As a result, many mortgage lending businesses are already suffering from sinking demand, and NerdWallet’s Holden Lewis says that should “soon” usher in a slowdown in home price increases, though the dearth in available homes for sale (still one-third of normal levels) will likely help keep prices fairly elevated.
Though federal student loans are doled out with fixed rates (meaning existing loans won’t be affected), private loans—which represent about 8% of the market with some $131 billion in loans outstanding—often come with variable rates that tick up after Fed hikes.
A couple of rate increases alone likely won’t have a considerable effect on smaller-ticket items including auto financing, but major banks—including Bank of America, Wells Fargo and JPMorgan—on Wednesday started raising their prime interest rates, which are used to calculate loan costs, to 4.75%, compared to roughly 3.25% two years prior.
One bright spot? “The outlook for savers is getting better,” says McBride, pointing out high-yielding savings accounts and certificates of deposit will raise payouts even though most banks “are likely to be stingy about passing along higher rates.”
“Rising interest rates mean borrowing costs more, and eventually savings will earn more,” says McBride, adding that households should be taking steps to “stabilize their finances,” including paying down costly credit cards and other variable-rate debt, and boosting emergency savings. “Both will enable you to better weather rising interest rates, and whatever might come next economically.”
At the conclusion of their two-day policy meeting Wednesday afternoon, Fed officials said the central bank would raise the federal funds rate, which is the target interest rate at which commercial banks borrow and lend reserves, by 75 basis points to a target range of 1.5% to 1.75%—the largest hike since 1994 after a 50-basis-point increase last month. Experts only started expecting the hike after last month’s annual inflation reading unexpectedly hit a 40-year high of 8.6%.
What To Watch For
Though he previously ruled out a 75-basis-point hike, Fed Chair Jerome Powell on Wednesday said another such increase was on the table for July 27, when the central bank’s next policy meeting concludes.
$15.9 trillion. That’s how much debt American households held at the end of last quarter—the highest amount ever, according to the New York Federal Reserve. Though most of it is contained in fixed-rate housing debt, the overall figure has climbed at the quickest pace in 14 years as fast-rising home and auto prices helped tack more more than $1 trillion in debt over the past year.