Here’s where you'll feel the Fed’s interest rate hikes
The Federal Reserve moved forward this week with its promise to raise interest rates in an effort to curb inflation.
During its meeting this week, the board raised interest rates by 0.25% and announced six more increases are planned this year. The expectation is rates will reach 1.9% by year’s end. The Fed is planning another three hikes in 2023.
This has been the first increase since 2018 and the first step in the Fed’s promised “soft landing” of a post-pandemic recovery. Interest rates were dropped to zero in 2020 to cushion pandemic recession.
It’ll be a slow burn for the average household to feel the increase, said Jason Taylor, Professor of Economics at Central Michigan University. Given that the Fed has been leaning toward raising the interest rates for some time, the anticipation of higher rates has already been calculated into loans.
This rate increase will feel more shocking to younger generations like Millennials. Interest rates have been “artificially low” since 2007, Taylor said.
“We’re conditioned to the idea that money is free,” he said. “You don’t get paid anything to save and you don’t pay anything to borrow. And that’s just not normal.”
Here’s three areas where interest rate increases will be most noticeable this year.
The Fed’s decision has a domino effect. Raising the interest rates influences the Treasury note which then in turn determines 15-year and 30-year fixed rate mortgages.
The day after the Fed’s meeting, the Federal Home Loan Mortgage Corporation, or Freddie Mac, announced the 30-year fixed-rate mortgage exceeded 4% for the first time since May of 2019.
The average 30-year rate landed at 4.16% nationally. The 15-year fixed rate mortgage also increased to 3.39%. A year ago, 15-year and 30-year rates were at 2.40% and 3.09% respectively.
In Michigan, those rates are slightly higher at 4.73% for 30-year and 3.78% for 15-year fixed mortgages.
Low interest rates were driving demand in the housing market and a contributing factor in the soaring prices seen last year. Even with the Fed’s increase on the horizon, Michigan’s median price increased yet again in February.
The median sales price increased 14% compared to last year as residential homes went for an average of $220,000, according to Michigan real estate data company Realcomp.
Given that housing supply is still not back to pre-pandemic levels, it’s likely demand will stay high even as interest rates move away from those unprecedented lows.
The broad perspective is that the Federal Reserve Rate influences all the interest rates we come across in our monthly budgeting.
Again, some cost will be baked in over time — specifically over the six week period between Fed meetings. So the cost won’t show up overnight but will add up with time.
For example, at the end of 2021, the average APR for a five-year new car loan was 3.86%, according to Bankrate.com. The average rate moved up to 3.98% the week of March 10.
As the Fed inches up interest rates it will become more costly to have debt.
The average interest rate was 16.44% for cardholders who did not pay off their balance each month at the end of last year, according to the Federal Reserve.
At the beginning of March, WalletHub estimated the national average at 18.26%. Consumers will likely see that go up to reflect the new interest rate in the next couple statement cycles.
The winners of this interest rate hike will likely be baby boomers nearing retirement, Taylor said.
Banks usually follow the federal funds rate and so the last few years high yield savings accounts and certificates of deposits have made very few gains.
Stimulus dollars and stripped back spending left many Americans flush with cash during the pandemic. But with interest rates so low they turned to riskier investments, like the stock market, Taylor said.
“I think one thing people kind of miss is the impact on savers,” he said. “A lot of Americans have been forced to put their money into the risky assets because there’s nowhere you can go. There’s no safe assets out there that give you any interest.”
While higher interests are intended to slow down the economy on the whole as people borrow and spend less, it’ll be a nice boost to those saving for retirement, Taylor said.
Taylor warns that there’s really no way to game the system in a way to avoid these incremental increases. The market is especially delicate considering high inflation and the invasion in Ukraine, he said.
“The danger in acting is that you can’t anticipate these things and that’s why it’s sometimes better just to sort of stay the course,” he said.