The Fed — For more than a year, the Federal Reserve has taken unprecedented moves to battle inflation, raising bank lending rates eleven times in all. Many consumer rates have risen as a result of the changes.
The rate increases are supposed to reduce inflation, and they appear to be working so far.
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Inflation update from the Fed
In June, the most recent Consumer Price Index measurement showed that inflation was 3%. Meanwhile, the core Personal Consumption Expenditure Index, the Fed’s favored inflation metric, indicated that inflation declined to 4.6%.
Regardless, all figures are significantly over the Fed’s 2% target, showing that the US central bank is reluctant to ease off on rate hikes.
“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.
On Wednesday, the Federal Reserve noted three ways the latest rate hike may help or damage the general public.
Savings opportunities
According to Bankrate, the national average savings account interest rate as of July 17 was 0.52%. On the other hand, people’s money can earn a bit more in online high-yield savings accounts, particularly at FDIC-insured institutions.
Several FDIC-insured banks were charging rates ranging from 4.5% to 5% as of Wednesday.
People with enough money in their savings account to keep it untouchable for a month to a year can lock in a high rate by putting it in an FDIC-insured bank.
Although the average interest on a one-year CD was only 1.58% as of July 17, there are several that pay more than 5%. There are also shorter-term CDs with interest rates that vary from 4% to 5%. According to Schwab.com, some pay 5.35%.
Credit card rates still high
Credit card interest rates are growing in lockstep with Fed interest rates. Card rates have been increasing at more than 20-year highs in recent years, according to reports.
The average credit card interest rate as of July 19 was 20.44%, according to Bankrate.com. The rate has declined somewhat from 20.58% the previous week. In any case, it is more than 6 percentage points more than the average for the preceding year.
The average of 20.44% applies to all cards, even those who never pay interest after making full and on-time payments every month. A closer examination of people who pay interest because they have a monthly balance finds that the average rate is greater. The average rate is 22.16%, according to the Fed’s second-quarter numbers.
People who are in debt will have to pay more money in interest if they only pay the bare minimum. As a result, repaying their debts would take longer.
“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 clients can choose a suitable balance-transfer card with an initial 0% rate for over 21 months and pay what they owe in the months before the 0% rate expires. Otherwise, the remaining debt would be subject to a higher interest rate than before the transfer.
Mortgage cost remains high
Almost everything associated with housing (buying, renovating, and even borrowing against a home) takes a significant portion of people’s income, and the cost has steadily climbed.
The average 30-year mortgage rate in the week ending July 20 was 6.78%, down from 6.96% the previous week, according to Freddie Mac. It is, nevertheless, greater than the 5.54% rate observed in 2022.
People who take up a $350,000 30-year fixed-rate mortgage today would pay $281 more each month than they would if they took out the loan in 2022 at 5.54%. This adds up to an extra $101,600 over the life of the loan.
People who are going to buy a home should be aware of prospective rate increases. If they can afford the loans, they should lock in the lowest fixed rate available.
Mortgage rates are also not directly related to the Fed’s overnight lending rate. Instead, they track the yield on the 10-year US Treasury note. The yield on the note reflects market expectations for the economy and inflation.
If inflation remains low, the 10-year yield may fall, forcing mortgage rates to decline.
Meanwhile, fixed-rate equity loans and variable-rate credit lines are tightly linked to Fed operations. As of July 25, the average national rate for a home equity loan was 8.47%, according to Bankrate. Meanwhile, the average home equity line of credit interest rate is 8.58%.
The rate that people can get is determined by a variety of factors, including:
- The size of the loan
- Credit score
- How much equity they have in their home
- Income
According to McBride, those who have used a home equity line of credit for home improvements can ask their lender if they may adjust the rate on their remaining debt, culminating in a fixed-rate home equity loan. If they are denied, they may consider repaying the loan with a HELOC from a different lender at a reduced promotional rate.
