A year ago, the Federal Reserve began raising its benchmark interest rate from near zero in an effort to curb inflation. Wednesday’s 25 basis point hike was the ninth consecutive increase in the central bank’s benchmark rate
And while inflation is falling from four-decade highs, debt interest rates are starting to pile up. “It’s kind of insidious,” said Kelly LaVigne, vice president of consumer insights at Allianz Life. It makes everything so much more expensive without you noticing
Ashley Agnew said, “For people who are aware of their debt, higher interest rates amplify worries”. She also said, “It feels more like a penalty than an interest rate”.
The Fed’s interest rate decisions have huge implications for the economy and the stock market – especially given that questions are now being raised about the health of the banking sector.”
Credit cards are a key example of the insidious effects of interest rates when costs are high, said Ted Rossman. “It has made a bad situation worse. “The cumulative effect is really significant.”
The Federal Reserve’s fed funds rate directly affects the prime rate that credit card issuers use to set the APR. It can take a billing cycle or two for a Fed funds rate increase to affect the APR on an existing account, but it can raise the interest rate on new offers within days, experts said.
According to the New York Fed, Americans had a total of $968 billion in credit card debt at the end of 2022. .
The Fed’s interest rate also indirectly affects the interest rates lenders use for auto loans and mortgages, as well as the interest rates banks use to determine the annual percentage yield on savings accounts.
Anyone looking to buy a home can easily see the impact of a change in mortgage rates on their monthly payments. Demand for mortgage loans increased last week after interest rates fell for a second week.
Mike Fratantoni, senior VP and chief economist said, “Homebuyers in 2023 have shown they are very sensitive to changes in mortgage rates”. Higher rates can make buying a car even more unaffordable at a time when the average monthly payment for a new car is over $700.
But after years of relatively low interest rates, the increases are giving savings accounts a new sheen.
According to DepositAccounts.com, the average interest rate on a high-interest online savings account is now 3.5%, up from 0.49% in March 2022. At the same time, inflation is weakening consumers’ ability to save money, according to Ken Tumin, founder and publisher of the website.
Tumin said, “The hope is that once inflation comes down, we’ll have a period-at least some period-where we’ll have really positive returns on savings and CDs, where the interest rate on savings accounts is above the rate of inflation.
Agnew has a client at Centerpoint Advisors who is in her 20s, at the beginning of her career and financial life. It wasn’t until interest rates rose rapidly that she realized money can grow in a savings account and that it’s not a marketing ploy. “Oh, I thought banks were just doing it to be nice,” Agnew recalls her customer saying.
And as interest rates rose, so did borrowers’ debt. According to the New York Fed, Americans had $16.9 trillion in mortgage and consumer debt at the end of 2022.
It’s hard to say how much of that debt is interest. But there are other signs of how higher interest rates are affecting consumers.
Interest paid on consumer debt, including credit cards, gobbles up the same amount of disposable income today as it did when the pandemic began. According to the Federal Reserve’s most recent third quarter 2022 report, consumer debt service payments account for 5.75% of disposable personal income.
When mortgage interest is added, 9.7% of household disposable income was spent on housing borrowing costs and consumer debt in the third quarter of last year.