Consumers have been paying more for gas, groceries and everyday items, but they will pay more in other parts of their lives after Wednesday’s rate hike.
The Federal Reserve’s move to curb inflation will affect home mortgages, credit card loans, auto loans, labor market stability and general consumption. The goal is to reduce the money supply in the economy.
“Too much money makes money less valuable,” said Larry Harris, a professor of finance at the USC Marshall School of Business and a former chief economist at the US Securities and Exchange Commission. “To control inflation, the Fed has to stop creating so much money. And when it stops making money, interest rates tend to go up.”
Although the Fed does not set the interest rate consumers pay on their credit cards, mortgages, or personal loans, it does control the federal funds rate, which is the base rate that banks charge. borrow and lend to each other. As that changes, so does the consumer interest rate.
Banks are required to have a certain amount of money in reserve, and when they give loans to people who want to buy a home, car or start a business, they may have to borrow from other banks to ensure they maintain their balance. that reserve.
At this time last year, interest rates on borrowing from the banking system were generally 0%, said Leo Feler, senior economist at UCLA Anderson Forecast. At that rate, banks are more willing to lend to consumers because there are essentially no costs involved in covering their reserves. However, now, with interest rates higher from 1.5% to 1.75%, banks will want to make sure they have enough reserves and act more cautiously, thus reducing loans. buy a home, car or other loan, he said.
Financial markets have priced in expectations of higher interest rates – mortgage rates hit 6%, for example. The question is: How high will they go?
“The Fed has telegraphed that it will continue to raise rates until inflation comes down, regardless of that,” Feler said.
Here’s what consumers can expect to see after Wednesday’s rate hike.
Mortgage interest rate
An increase in the Fed’s benchmark interest rate will affect a minority of households with adjustable-rate mortgages or home equity lines of credit, potentially increasing their borrowing costs.
Harris of USC said affected homeowners who have the option to convert to fixed-rate loans may want to consider doing so.
The impact on fixed-rate mortgages – including the popular 30-year fixed loan – is less certain.
Mortgage experts say the federal funds rate hikes won’t affect these mortgages directly, but they could indirectly push fixed mortgage rates higher or lower if actions by The Fed influences investors’ thinking about fixed inflation levels.
That’s because if inflation is expected to be high in the future, investors will demand higher yields or interest on mortgages before they buy them.
Mortgage rates have risen this year, rising from 3% in January to above 5% last week and are by some measures now as high as 6%.
The sharp rise in borrowing costs has put some homebuyers in a new price bracket and priced others together, sending home sales down in the process.
Mortgage industry consultant David Stevens, who is also a former head of Mortgage Bank, said: Assn.
A larger Fed rate hike could panic investors and push mortgage rates higher, said Keith Gumbinger, vice president at research firm HSH.com.
Credit card debt
Credit card interest rates are not set by the Fed, but they do vary with the federal funds rate. As this rate increases, so will the credit card interest rate.
“With interest rates rising, people who already have variable-rate loans, like those who borrow with their credit cards, should try to reduce their balances as quickly as possible,” said Harris of USC. “Otherwise, they will pay a higher price in the future, which will hurt them.”
Labor market shifts
UCLA’s Feler said a higher-than-expected Fed rate hike would mean hiring slows and possibly even more layoffs. He forecasts the national unemployment rate will rise to 4.5% by the end of the year, up from 3.6% now.
A tighter job market means consumers will be nervous about keeping their jobs and less likely to demand higher wages. It also means that people in low-paying jobs or jobs they don’t like are likely to stay in their positions for fear of being unemployed.
“This trickles down the entire workforce,” says Feler. “As unemployment rises, wage growth tends to slow.”
Less demand for goods
When interest rates rise, it will be much harder for consumers to go out and shop. That means less demand for the commodity.
Consumers stop buying for fear of losing their jobs. Discretionary spending like going out to dinner or streaming services is cut. Furniture and home appliance sales are slow because homebuyers will be out-of-market prices. The purchase of big-ticket items has been eliminated.
That means fewer trucks moving goods between ports and depots, UCLA’s Feler said.
“The way you tame inflation expectations is you create an economic slowdown, so people are worried about getting a job a year from now,” he said.
https://www.latimes.com/business/story/2022-06-15/what-does-fed-rate-hike-mean-for-consumers How will the Fed interest rate hike affect you?