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May 3 Update:
As expected, the Federal Reserve raised interest rates by a quarter of a percentage point. Fed Chair Jerome Powell defended the Fed's position to increase rates despite the banking crisis, saying that bringing down inflation is in the best interest of Americans. However, in a post-meeting statement, the Fed hinted at a possible rate hike pause in the future.
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The Fed is expected to raise interest rates by another 0.25% this month, continuing its efforts to rein in stubborn inflation. This would push the Fed’s benchmark rate to 5%-5.25%. The benchmark rate hasn’t been this high in almost 16 years.
If the hike goes through tomorrow, it will also mark the tenth Fed rate hike in a row.
Last tightening cycle?
Many economists are predicting that this just might be the Fed’s last rate hike for a while. They attribute this to recent stress in the banking system, which has seen three major banks collapse, including, of course, Silicon Valley Bank. Just today, JP Morgan Chase agreed to purchase First Republic Bank’s assets, formerly the country's fourteenth largest financial institution.
Banks, especially regional banks, are acting more conservatively in light of the recent environment. Financial analysts have weighed in, saying that further rate hikes would cause undue stress on the banking system.
What is the Fed's benchmark interest rate?
The benchmark rate affects the interest rates that banks charge their customers for loans and mortgages, as well as the interest rates that savers earn on their deposits. In general, when the Fed raises the benchmark rate, it tends to make borrowing more expensive. This can slow down inflation and economic growth. When the Fed lowers the benchmark rate, it tends to make borrowing cheaper, which can stimulate the economy.
What does this mean for you?
The series of Fed interest rate hikes essentially mean that it's getting more and more expensive to borrow money.
Additionally, although the overall employment picture in the US remains strong, incomes haven't kept up with inflation. US households are finding that their dollar is just not going as far as it used to, and many Americans are relying heavily on credit cards.
Lets break down how the interest rate hike might affect common financial products.
- Credit cards: APRs on credit cards are reaching an all-time high of 20%, and nearly half of Americans are carrying a balance from month to month. If credit card debt isn't managed properly, it can potentially lead to an economic crisis.
- Mortgages: Homeowners have had a tough go given inflation and continued interest rate hikes. The average rate for a 30-year, fixed-rate mortgage currently sits at around 6.48%, down from the high, but still significantly higher than a year ago.
- Auto loans: Although most auto loans are fixed, payments for the average American are still growing given the rising cost of cars and interest rates.
- Student loans: Student loans are also fixed interest products, but be aware that payments are expected to resume before the end of the year.
Now is the time to save
The biggest winners from rising interest rates? Savers.
Some savings products are at all-time highs, including long-term CDs and certain high-yield savings accounts. If you have money you can set aside, consider moving it to a Certificate of Deposit (CD) account, where you can get rates of 4-5% at certain providers. Read more about different types of saving products here: Discover Safe and Better Alternatives to Savings Accounts.
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Bar has over 10 years of experience in building corporate strategy, digital innovation and communications campaigns for financial services and fintech brands, from early stage to publicly traded. She has been on the front foot of the financial news cycle, advising clients on market trends, breaking news, technology and more.
