The Fed — The Federal Reserve has taken extraordinary steps to battle inflation for more than a year, hiking bank lending rates for a grand total of eleven times. As a result of the adjustments, many consumer rates have risen.
The rate hikes are intended to reduce inflation, and they appear to be working so far.
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Inflation update from the Fed
The most recent Consumer Price Index measurement in June reported 3% inflation. Meanwhile, the Fed’s preferred inflation indicator, the core Personal Consumption Expenditure Index, showed that inflation fell to 4.6%.
In any event, both percentages are far higher than the Fed’s 2% objective, indicating that the US central bank is unlikely to stop raising interest rates very soon.
“Despite the euphoria over inflation coming down from 9.1% to 3% in the past year, the trend on core inflation readings – which exclude volatile food and energy components to provide a better read on inflation trends – is much less impressive,” said Greg McBride, the chief financial analyst of Bankrate.com.
“We may be waiting for a protracted period of cooling inflation before we see a halt to interest rate hikes,” added Michele Raneri, the vice president and head of US research and consulting at TransUnion.
The Federal Reserve noted three ways in which the latest rate rise may benefit or harm the general population on Wednesday.
Savings opportunities
According to Bankrate, the national average savings account interest rate was 0.52% as of July 17. People’s money, on the other hand, may earn somewhat more if invested in FDIC-insured online high-yield savings accounts.
As of Wednesday, many FDIC-insured banks have requested rates ranging from 4.5% to 5%.
If you have enough money in your savings account that will endure a month to a year, you can secure a high interest rate by transferring it to an FDIC-insured bank.
Although the average one-year CD interest rate was only 1.58% as of July 17, there are a few that pay more than 5%. Shorter-term CDs with interest rates ranging from 4% to 5% are also available. Some pay 5.35%, according to Schwab.com.
Credit card rates still high
Credit card interest rates are rising in lockstep with the Federal Reserve’s interest rates. According to studies, credit card rates have lately risen to more than 20-year highs.
According to Bankrate.com, the average credit card interest rate as of July 19 was 20.44%. The rate has fallen somewhat from 20.58% the previous week. Regardless, it is more than six percentage points more than the previous year’s average.
The average interest rate on most cards, including those that never charge interest if payments are made on time, is 20.44%. A thorough assessment of people who pay monthly loan interest reveals that the average rate is higher. According to the Fed’s second-quarter data, the average rate is 22.16%.
Debtors who pay only the bare minimum will be charged extra interest. Repaying their obligations would become more difficult as a result.
“For someone with $5,000 in credit card debt on a card with a 22.16% [rate] and a $250 monthly payment, they will pay $1,298 in total interest and take 26 months to pay off the balance,” said LendingTree chief credit card analyst Matt Schulz.
“Cardholders’ best move is to assume that rates will continue to rise, and use that as further motivation to continue to knock down their credit card debt.”
Credit card users can pick a balance-transfer card with a 0% interest rate for a period of 21 months and pay off the debt before the 0% rate expires. Otherwise, the residual debt’s interest rate would be greater than before the transfer.
Mortgage cost remains high
Almost everything associated with housing (purchasing, renovating, and even borrowing against a property) consumes a sizable amount of people’s earnings, and the cost has continuously risen.
According to Freddie Mac, the average 30-year mortgage rate in the week ending July 20 was 6.78%, up from 6.96% the previous week. However, it is higher than the 5.54% rate seen in 2022.
A $350,000 30-year fixed-rate mortgage obtained now will cost $281 more per month than one obtained at 5.54% in 2022. This amounts to an additional $101,600 over the course of the loan.
Prospective home buyers should be warned about potential rate increases. If they are capable of repaying the loans, they should lock in the lowest possible fixed rate.
Mortgage rates are also unrelated to the Federal Reserve’s overnight lending rate. They instead follow the yield on the 10-year US Treasury note. The note’s yield reflects market forecasts about the economy and inflation.
If inflation continues low, the 10-year yield may fall, resulting in lower mortgage rates.
Variable-rate credit lines and fixed-rate equity loans, on the other hand, are inextricably connected to Federal Reserve operations. According to Bankrate, the average national rate for a home equity loan as of July 25 was 8.47%. Meanwhile, the average interest rate on a home equity line of credit is 8.58%.
Consumer interest rates are determined by a number of factors, including:
- The size of the loan
- Credit score
- How much equity they have in their home
- Income
Those who have utilized a home equity line of credit for home upgrades, according to McBride, may ask their lender if they may modify the interest rate on their remaining debt, resulting in a fixed-rate home equity loan. If they are turned down, they may think about recovering the loan with a HELOC from another financial institution at a lower promotional rate.
