by Stephen Reed | Accounting News, News
Last year the Federal Reserve began raising interest rates at a pace not seen since inflation soared this high 40 years ago. By raising interest rates, borrowing becomes more expensive for individuals and businesses, which can lead to reduced spending and investment. This, in turn, can help slow down inflationary pressures. The Fed recently approved its 10th interest rate increase in the effort to curb inflation, but are these hikes working? We discuss below.
A Subtle Hint
Will this be the Fed’s last rate hike for a while, or will the central bankers raise rates yet again at their June meeting? The Fed issued a recent statement in which they dropped a line that was previously used about the likely need for additional rate increases, which has caused some to speculate that the Fed may be pausing rate hikes. Given signs of a softening job market and slower economic growth, as well as brewing turmoil in the banking sector, an assessment to pause rate increases isn’t far-fetched.
Have the Rate Increases Been Successful?
The Fed raised rates at ten consecutive meetings, pushing its benchmark rate to between 5 and 5.25%, and the increases have shown some markers of success. Inflation showed signs of easing at the end of 2022 and the beginning of 2023. And after a strong January, consumer spending slowed sharply in February and March. However, it’s still more than twice as high as the central bank’s target of 2%. After the May 2023 meeting, Fed Chair Jerome Powell told reporters, “We remain strongly committed to bringing inflation back down to our 2% goal.” He added that this will take time, and the Fed is prepared for the possibility of additional rate hikes if such a move is warranted. However, some experts warn that attempting to hammer away at inflation by further increasing rates could put more jobs in jeopardy, without necessarily having a great impact on inflation.
by Daniel Kittell | Accounting News, Financial goals, News
The Federal Reserve recently raised its target federal funds rate by half-a-percentage point, which is the largest interest hike in more than 20 years. This follows an initial quarter-point increase in March. Read on to find out how rising interest rates could impact credit cards, mortgages, auto loans, and savings accounts.
A Delicate Dance to Avoid Recession
Analysts expect more hikes in 2022, taking the federal funds rate to above 2.5% or even 3% by year’s end. The challenge here is raising rates to curb inflation without raising them high enough to trigger a recession. While it will take some time to determine whether rate increases will curb inflation, the effect on your finances could be immediate. Anything from savings account interest to borrowing power to mortgage loans and refinances could be impacted.
Credit Card Interest
Individual banks and financial institutions use the federal funds rate as a starting point to set their own prime rate, or the interest rate passed onto the most creditworthy consumers. Most credit card issuers add several percentage points to the prime rate, so the average credit cardholder can expect their interest rates to be above the prime rate. According to the Federal Reserve, the average interest rate last year was 16.44 percent for cardholders who did not pay off their balance each month. With the latest half percentage point rate hike, an interest rate of 16.44 will increase to 16.94.
If you are carrying credit card debt, think about transferring a high-interest balance to a credit card with a 0% introductory rate. Many cards offer 0% APR for the first 12-21 months. This move will shield you from the rate hikes that are coming down the pipeline while also providing an interest-free path to get that debt paid off for good.
Savings Accounts
While higher interest rates typically raise costs for borrowers, it can mean higher yields for savers. Whether or not rate increases will translate to greater revenue depends on the type of account and can vary from institution to institution. While larger banks already have plenty of deposits, and therefore have little incentive to pay depositors more, smaller banks and credit unions may start raising rates on savings accounts in order to gain new customers. This puts pressure on other institutions to increase their rates, which can cause a domino effect of increasing rates across institutions.
Mortgage Loans
The Federal Reserve does not set mortgage rates, and unlike with savings accounts, the central bank’s decisions don’t impact mortgage rates as directly. However, the mortgage industry as a whole is keenly aware of the Fed, and the industry’s ability to interpret the Fed’s actions means that mortgage rates usually move in the same direction as the federal funds rate. Keep in mind, however, that mortgage rates also react to the ebb and flow of the U.S. and global economies, moving up and down daily. A point worth noting: other types of home loans, like adjustable-rate mortgages and home equity lines of credit, are more in step with the Fed’s move, so these loans will ordinarily move higher the next time an individual loan resets its rate.
Stocks and Bonds
If you are a long-term investor, your portfolio should be built with a balance of both stabilizing (bonds) and riskier (stocks) investments, which means that it should be able to withstand tumultuous periods like this. It’s best not to panic and instead focus on your long-term financial goals regardless of what happens in the short-term.
Car Loans
While car loan rates will increase as the Fed raises interest rates, car buyers need not be concerned because it has a very limited impact on monthly payments. For example, an increase of a quarter percentage point on a $25,000 loan is a $3 increase on monthly payments.
Student Loans
Borrowers who have federal or private student loans with a fixed interest rate won’t be affected by the Fed’s interest rate hikes, but borrowers with variable-rate student loans will see higher monthly payments and total interest charges over the life of the loan.
