Financial experts predict that the Federal Reserve will temporarily halt its aggressive interest rate increases in its upcoming meeting. However, consumers are unlikely to see any relief, even with the pause. The central bank has implemented 10 interest rate hikes since last year, the fastest it has done so since the 1980s. Unfortunately, inflation has remained above its 2% target. “We are living in uncharted territory,” remarked Charlie Wise, Senior Vice President and Head of Global Research and Consulting at TransUnion. “The combination of rising interest rates and elevated inflation, while not uncommon from a historical perspective, is an unfamiliar experience for many consumers.”
Higher prices have caused real wages to decrease, exacerbating household budgets and pushing more people into debt, especially considering that borrowing rates have reached record highs. Even with the pause, borrowing costs have gone up dramatically, making interest rates the highest they have been in years.
The federal funds rate, set by the U.S. central bank, is the rate at which banks borrow and lend to one another overnight. Although this rate does not directly impact the interest rate that consumers pay, the Fed’s policies still affect the borrowing and savings rates they encounter in their daily lives. Most credit cards come with a variable rate that has a direct connection to the Fed’s benchmark rate. With the previous rate hikes, the average credit card rate has reached an all-time high of more than 20%, and nearly half of credit card holders carry debt from month to month.
Although 15-year and 30-year mortgage rates are fixed, the Fed’s policy moves, coupled with inflation, have resulted in considerable purchasing power loss for anyone looking to buy a new home. Currently, the average rate for a 30-year, fixed-rate mortgage is at 6.9%, up from 5.27% last year and only slightly below October’s high of 7.12%. Adjustable-rate mortgages and home equity lines of credit (HELOCs) are pegged to the prime rate, which has followed suit with the increase in federal funds rate. The average rate for a HELOC stands at 8.3%, the highest in 22 years.
Auto loans have a fixed rate, but the prices for cars have risen along with new loan interest rates, making payments more expensive for borrowers. The average rate on a five-year new car loan is 6.87%, the highest since 2010. Federal student loan rates are mostly fixed, so most borrowers are not immediately affected by the Fed’s decisions. However, undergraduate students who take out new direct federal student loans will see interest rates increase to 5.50% as of July.
Deposit rates at some of the largest retail banks have increased to about 0.4% on average, thanks in part to lower overhead expenses. The highest yielding online savings account rates are now over 5%, the highest since the 2008 financial crisis. However, if the Fed avoids a rate hike in its June meeting, these deposit rate increases are likely to slow.
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