Student loans, car payments — how your debt can get more expensive when the Fed starts raising interest rates

top line

The Federal Reserve is set to hike interest rates for the first time in more than three years on Wednesday to combat the fastest rate hike in over 40 years, but a string of rate hikes will also make a string of bond offerings more expensive.

Important facts

“Now is the time to aggressively pay off high-priced credit cards,” Bankrate Chief Financial Analyst Greg McBride said in emailed comments, noting that nearly all credit cards have variable interest rates that are consistent with the rate set by the US government Fed Federal Funds Rate fixed interest rate fluctuate.

A rate hike alone is unlikely to have a significant impact on smaller items, including auto financing, but McBride notes that there is uncertainty about how many more rate hikes are to come this year as the Fed tries to fight inflation amid rising oil prices.

Although federal student loans are distributed fixed prices which are unaffected, personal lending — which accounts for about 8% of the market, with about $131 billion in loans outstanding– often come with floating rates that rise after Fed hikes.

“Volatile markets and the uncertainties of war held back rising mortgage rates,” but McBride warns that home equity lines of credit almost always have variable rates that would have an impact almost immediately, and fixed rates are likely to rise for new mortgages; the average 30-year fixed-rate mortgage gone from 3.4% to 4.9% during the Fed’s last tightening cycle.

A glimpse of hope? “The prospects for savers are improving,” McBride says, noting that high-yield savings accounts and certificates of deposit will increase payouts, although most banks are “probably tight-fisted about passing on higher interest rates.”

What to look out for

Fed officials are expected to announce a 25 basis point rate hike at the end of their two-day policy meeting on Wednesday afternoon, but Fed Chair Jerome Powell wasn’t entirely clear on what might happen after that. “With inflation likely to remain uncomfortably high throughout the year, the [Fed] probably will only [stop raising rates] if it thinks further tightening could push the economy into recession,” Goldman Sachs economist David Mericle wrote in a note to clients Monday. Goldman expects the Fed to hike rates by 25 basis points at each of its remaining seven meetings this year, with a 50 basis point hike possible if economic downside risks abate from Russia’s invasion of Ukraine.

key background

Historically low interest rates and trillions of dollars in unprecedented government spending helped keep the economy afloat during the pandemic, but historically high inflation rates have rocked the market in recent months — and more recently. The S&P 500 index is down nearly 10% this year amid growing concerns about geopolitical tensions and interest rate hikes, which tend to hurt corporate earnings and stock prices.

Big number

$15.6 trillion. This is how high the debt of American households was in the last quarter – according to the highest total ever New York Federal Reserve. Although most of that is contained in fixed-rate housing debt, the total rose last quarter by the largest amount in 14 years as rapidly rising home and auto prices helped push mortgage balances by $258 billion and auto loans by $181 billion US dollars rose. Credit card balances, on the other hand, increased by $52 billion, while student loan debt actually shrank by $8 billion.

Continue reading

Inflation rose 7.9% in February, hitting a 40-year high amid growing uncertainty over record gas prices (Forbes)

Fed meeting minutes signal March rate hike still on track (Forbes)

About Natalee Broderick

Check Also

EPA Announces $65 Million in WIFIA Loans to Modernize Water Infrastructure in Multnomah County, Oregon

Funding from the Rockwood Water People’s Utility District and the City of Gresham will support …