Over two days, this week, the Federal Reserve will conduct its Federal Open Market Committee meetings. And during this session, many expect the central US bank to raise its benchmark interest rate, for the fourth meeting in a row. This time, the rate increase could be around 0.75%.
Analysts hope that after this session, the central bank will slow its acceleration in order to lower overall inflation. If data persistently demonstrates high inflation, however, there is still a chance the rate hikes will continue.
Whether or not another rate hike is in the cards, the impact of what has been done is still not fully reflected across the economy. After all, we have not seen inflation come back down by much. Former SEC chief economist Chester Spatt advises this is because it takes a while for policies to take hold.
Also a Carnegie Mellon University Tepper School of Business professor of finance, Spattt says that, in the meantime, “the impacts on the consumer have created potentially difficult economic circumstances and are likely to get considerably worse as we get more of these rate hikes kicking in.”
And this impact has a host of implications across many industries. Take mortgages, for example most mortgage rates are fixed and tied to Treasury yields and the overall economy. The average interest rate on a 30-year fixed-rate mortgage is now near 7%, which is already the highest level in 2.5 years.
However, adjustable-rate mortgages and home equity credit lines are provided at the prime rate—whatever that is, no matter how often it changes. Most ARMs, fortunately, only adjust once a year. A HELOC adjusts immediately, with an average rate currently at 7.3%, up from 4.24% YOY.
Other credit products, generally have a variable rate(s) so it will be directly affected by the shift in the Fed’s benchmark. Federal fund rate rises, lifting the prime rate and then the credit card rates closely follow, for example. Annual percentages are up more than 16% since the top of the year.
Both auto loans and student loans will also be affected. Now, auto loans are fixed but payment amounts are increasing, to the highest they’ve been in 11 years. While the benchmark rate won’t do much to the interest costs on an auto loan, it will, effectively, quite simply raise the base price of the car. Similarly, federal student loan aid interest rates could increase again, already up to 4.99% from 3.73% last year (and 2.75% between 2020 and 2021), if the fed rate goes up again.
