WASHINGTON (AP) – Record low mortgages below 3% are long gone. Credit card rates are likely to rise.
So will the cost of a car loan. Investors can finally get a return high enough to exceed inflation.
A substantial half-point increase in its benchmark short-term rate, announced by the Federal Reserve on May 3, will not in itself have a significant direct impact on the finances of most Americans.
But the next two meetings of the Fed, in June and July, are expected to announce additional large rate hikes, and economists and investors predict the fastest rate hikes since 1989.
The result could be a much higher cost of borrowing for households in the future as the Fed struggles with the most painful inflation in four decades and completes a decade of historically low rates.
Chairman Jerome Powell hopes that by making loans more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services and thereby slow inflation.
However, the risks are high.
Due to the fact that inflation is likely to remain high, the Fed may have to increase borrowing costs even higher than currently expected. This could push the US economy into recession.
Here are some questions and answers about what raising rates can mean for consumers and businesses:
I’m thinking of buying a home. Will mortgage rates continue to rise?
Mortgage rates have risen in the last few months, mostly in anticipation of Fed moves, and are likely to rise.
Mortgage rates do not necessarily rise in tandem with the Fed’s rate hike. Sometimes they even move in the opposite direction.
Long-term mortgages tend to track the yield on 10-year Treasury bonds, which in turn is influenced by a variety of factors. These include investors ’expectations regarding future inflation and global demand for U.S. Treasury bonds.
For now, however, faster inflation and stronger U.S. economic growth are sending the 10-year Treasury rate sharply up.
As a result, mortgage rates have jumped by 2 full percentage points since the beginning of the year, to 5.1% on average for a 30-year fixed mortgage, according to Freddie Mack.
In part, the jump in mortgage rates reflects expectations that the Fed will continue to raise the key rate. But his future campaigns are likely not yet fully appreciated.
If the Fed raises its key rate to 3.5% by mid-2023, as many economists expect, the yields of 10-year Treasury bills will also rise, and mortgages will become more expensive.
How will this affect the housing market?
If you want to buy a home and are frustrated by the lack of affordable homes, which has led to a war of bidding and tearful prices, this is unlikely to change any time soon.
Economists say higher mortgage rates will discourage some potential buyers. And average house prices, which are rising at about 20% per annum, may at least grow at a slower pace.
The surge in mortgage rates “will slow the pace of rising house prices as more potential home buyers are valued,” said Greg McBride, chief financial analyst at Bankrate.
However, the number of available homes remains historically low, a trend that is likely to disappoint buyers and support high prices.
What about car loans?
Raising the Fed’s rates could make car loans more expensive. But other factors also affect these rates, including competition among carmakers, which can sometimes lower the cost of loans.
Rates for buyers with lower credit ratings are likely to rise as a result of the Fed’s boost, said Alexei Yurchenko, chief of the Black Book, which tracks car prices in the United States. As prices for used cars rise on average, so will monthly payments.
Now loans for new cars average about 4.5%. Rates on used cars are about 5%.
What about other bets?
For users of credit cards, equity lines of credit and other debt with variable interest rates, rates will rise by about the same amount as a Fed boost, usually over one or two billing cycles. This is because these rates are based in part on the primary rate of banks moving in tandem with the Fed.
Those who do not qualify for low-interest credit cards may be delayed, paying higher interest on their balance sheets. The stakes on their cards will grow, as will the first bet.
If the Fed decides to raise rates by 2 percentage points or more over the next two years – an obvious possibility – it will significantly increase interest payments.
Will I be able to earn more on my savings?
Perhaps, though not very much. And it depends on where your savings are, if they are.
Savings, certificates of deposit and money market accounts do not usually track changes in the Fed. Instead, banks are trying to use higher rates to try to increase their profits.
They do this by setting higher rates for borrowers, not necessarily offering any juicer rates to savers. Now this is especially true for large banks.
They were flooded with savings as a result of government financial aid and spending cuts by many wealthy Americans during the pandemic. They won’t need to raise savings rates to attract more deposits or CD buyers.
But online banking and other banks with high-yield savings accounts may be exceptions. These accounts are known for aggressive competition for depositors. The only catch is that they usually require significant deposits.
However, investors are beginning to see some better potential returns on Treasury bonds. On May 3, the yield on 10-year bonds was 2.96%, after briefly exceeding 3% for the first time since 2018.
In the financial markets, inflation is expected to average 2.83% over 10 years. This level will give investors a positive, albeit very small, return of about 0.13%.
“Suddenly we find ourselves in a situation where fixed income is much more competitive than it used to be,” said Jason Pride, director of private wealth investment at Glenmede.
How higher Fed rates affect Americans’ finances – AgriNews
Source link How higher Fed rates affect Americans’ finances – AgriNews