Last week, the U.S. Federal Reserve met and published its meeting minutes to the public on September 20th. It was the decision of the Federal Open Market Committee (FOMC) not to raise interest rates as they had done for 11 of the 12 meetings prior. This means the federal lending rate will remain steady at 5.25% to 5.50% for the time being. For context, this is the highest that interest rates have been in 22 years.
The Fed’s decision comes in spite of the fact that inflation rose slightly for the month of August. According to the Bureau of Labor and Statistics, the 12-month change in CPI was up 3.7 percent. At the same time, core inflation (the preferred inflation measure by the Fed) shot up by 4.3 percent for the year. This is well above the Fed’s ultimate target of 2 percent for the overall economy.
To date, action taken by the Fed has helped to bring inflation off of its 9.1 percent peak back in June 2022. However, the FOMC has a dual responsibility to keep the unemployment rate low while it combats inflation. Therefore, it can’t raise rates too aggressively and instead opts to take a more cautious approach. Time and time again, Fed Chairman Jerome Powell has referred to a scenario of a “soft landing” where they wish to bring inflation under control but not at the expense of throwing the economy into a recession.
Going forward, it was unclear how much additional action the Fed plans to take. Powell hinted that at least one more rate hike would be likely before the end of 2023. The next FOMC meeting will take place on November 1, 2023.
What Fed Rate Increases Mean For Your Money
The federal funds rate sets the pace of nearly every consumer financial product available. Simply put, when the interest rates go up, so does the cost of borrowing money in nearly every way.
That’s an important situation to be aware of because it does not appear that interest rates will be reversing direction any time soon. According to the Fed’s dot plot – a projection of where interest rates will be in the years to come – rates aren’t expected to make any major reversals until at least 2025.
In terms of what this means for finances, here are a few of the ways that higher interest rates may affect you directly.
Mortgages
This week, the average APR of a 30-year fixed-rate mortgage was 7.42%. This is a level of interest rates we haven’t seen since December 2000, and it’s a dramatic hike from the nearly 3% range we used to be in just two years ago.
This affects consumers in several ways.
- New mortgages. For starters, anyone who’s looking to move or needs to relocate due to a job will be forced to trade in their low-interest mortgage for one with a much more substantial rate. Depending on the amount of money being borrowed and the applicant’s credit rating, a higher rate can easily add hundreds of dollars to a monthly home payment.
- Refinancing. Those who want to refinance their mortgage for a better rate, shorter term, or to take advantage of a cash-out withdrawal are unfortunately out of luck. Given the dramatic increase in rates, the mortgage that the majority of people have right now might possibly be the best one that they’ll be able to get for quite some time.
- Home equity loans. During the COVID pandemic, many people took the opportunity to spruce up their homes by borrowing against their home equity. At the time, rates were extremely cheap so borrowing was very affordable. But now that rates have soared, tapping home equity won’t be as viable of an option as it was a few years ago.
Auto Loans
Alongside mortgages, the rates to borrow money to buy a new or used car are also up. The average auto loan rate is currently 6.63% for new cars and 11.38% for used cars.
Just like home payments, these rates add hundreds of dollars to consumer’s monthly payments. As a matter of fact, 17.1 percent of new car buyers are looking at owing more than $1,000 per month.
Credit Cards
There’s never been a better time than now to avoid carrying a balance on your credit card. The average APR on credit cards is up to 28.05%. That means for every $1,000 of debt you carry you’ll owe at least $280 per year.
If you aren’t already, take control of your spending by monitoring your purchases. This can be done using a helpful budgeting app like Buxfer. Buxfer consolidated the transactions from each of your credit cards and banks into one report so that you only need to check one comprehensive overview.
Good High-Interest Rate Opportunities
There are always two sides to every coin. While rising interest rates may be making financial products more expensive, it’s also creating a goldmine of opportunities for many people – particularly savers.
Consider the following:
- Banks are offering CDs (certificates of deposit) above 5%
- Most reputable online savings accounts are paying greater than 4%
- The U.S. Treasury is offering APRs above 5% for short-term T-bills
All of this is great news for money you were planning to use for a major purchase such as a down payment on a new car, house, or upcoming event. Rather than risk your money in the stock market, you can park it in one of these ultra-safe products and enable it to accumulate some modest growth.
These high-yield tools are also ideal for something like your emergency fund. Don’t forget that you should have a stash of 3 to 6 months’ worth of living expenses set aside for unplanned events. Since that could be several thousand dollars, putting it in some place where it will earn interest is an efficient way to manage it.
While we can’t control interest rates will be now or in the future, we can choose how we decide to react to them. The more you can do to avoid taking on debt, the less affected you’re going to be. Monitor your budget and leverage rising interest rates to your benefit, and you’ll be fine as you ride out the storm.
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