Fed interest rate hike expected to impact mortgages and auto loans

Mortgages, car loans and credit card debt are about to get more expensive.

The big picture: The era of cheap borrowing is over: the Federal Reserve is trying to rein in the economy, and the cost of borrowing is rising as it rushes to contain inflation.

  • Higher borrowing costs could cause consumers and businesses to withhold certain purchases. This will cool demand and possibly put a damper on prices that are rising at the fastest rate in over 40 years.

Catch up fast: The Fed announced yesterday that it would raise interest rates by three-quarters of a percentage point, the biggest hike since 1994.

  • With this announcement, the Fed has raised rates by 150 basis points since March to a range of 1.50 and 1.75%. New projections show that interest rates could reach 3.4% by the end of this year.
What to watch

Home loans: The rate on a conventional 30-year fixed rate mortgage is now above 6%, at least by an estimate. This time last year: 3.1%.

Credit card debt: The average credit card rate reached 16.7%, compared to 16% last year, according to The bank rate. Credit card rates, closely tied to Fed measures, are expected to continue to rise, compressing consumers with balances.

Car loans: Rising interest rates and rising prices had already pushed the average monthly car payment to an all-time high of $656 for new vehicles and $546 for used rides, according to Edmunds.

  • New car borrowers accepted an average interest rate of 5.1% in May, down from 4.5% a year earlier and the highest level since March 2020.
  • Automakers and car dealerships may be reluctant to let rates climb too high for fear of driving away customers, said Jessica Caldwell, executive director of Edmunds, in a written analysis.

The bottom line: Some savers may see at least some relief, in the form of earning a bit more on the money placed in savings, depending on the bank. But since inflation is rising much faster than any of these rates, the savings money continues to erode.

Comments are closed.