The Fed — For over 17 months, the Federal Reserve has taken exceptional measures to combat inflation, raising bank lending rates a total of eleven times. Many consumer rates have risen as a result of the changes.
The rate increases are designed to lower inflation, and so far they appear to be working.
Inflation update on the Fed
In June, the latest Consumer Price Index measurement revealed 3% inflation. Meanwhile, the core Personal Consumption Expenditure Index, the Fed’s favored inflation metric, indicated that inflation declined to 4.6%.
In any case, both percentages are far higher than the Fed’s 2% target, implying that the US central bank is unlikely to cease hiking 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.
On Wednesday, the Federal Reserve outlined three ways in which the latest rate hike may help or damage the broader public.
As of July 17, the national average savings account interest rate was 0.52%, according to Bankrate. People’s money, on the other hand, could generate a bit more if placed in FDIC-insured online high-yield savings accounts.
Many FDIC-insured banks have sought rates ranging from 4.5% to 5% as of Wednesday.
If you have a sufficient amount in your savings account to last a month to a year, you may earn a high interest rate by moving it to an FDIC-insured bank.
Although the average one-year CD interest rate as of July 17 was only 1.58%, there are a handful that yield more than 5%. There are also shorter-term CDs with interest rates ranging 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 interest rates set by the Federal Reserve. Credit card rates have recently soared to more than 20-year highs, according to surveys.
The average credit card interest rate as of July 19 was 20.44%, according to Bankrate.com. The rate has dropped somewhat from 20.58% the previous week. Nevertheless, it is an increase of six percentage points than the average for the preceding year.
The average interest rate on most credit cards is 20.44%, including those that never charge interest if payments are paid on time. A comprehensive examination of those who pay monthly loan interest finds that the average rate is higher. The average rate is 22.16%, according to the Fed’s second-quarter statistics.
Debtors who pay only the bare minimum will face additional interest charges. As a result, repaying their debts would become more difficult.
“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.”
Users of credit cards can choose a balance-transfer card with a 0% interest rate for 21 months and pay off the obligation before the 0% rate expires. Otherwise, the interest rate on the leftover debt would be higher than before the transfer.
Mortgage cost remains high
Almost everything related to housing (purchase, renovation, and even borrowing against a house) takes a significant portion of people’s incomes, and the cost has steadily increased.
The overall average of a 30-year mortgage rate in the week ending July 20 was 6.78%, up from 6.96% the previous week, according to Freddie Mac. It is, nevertheless, greater than the 5.54% rate observed in 2022.
A $350,000 30-year fixed-rate mortgage purchased now will cost $281 more per month than one obtained in 2022 at 5.54%. This adds up to an extra $101,600 over the life of the loan.
Prospective home purchasers should be alerted about the possibility of interest rate rises. They should lock in the lowest available fixed rate if they are capable of repaying the loans.
Mortgage rates are also unconnected to the overnight lending rate set by the Federal Reserve. 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, causing mortgage rates to decline.
Fixed-rate equity loans and variable-rate credit lines, on the other hand, are closely linked to Federal Reserve 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%.
A variety of variables influence consumer interest rates, including:
- The size of the loan
- Credit score
- How much equity they have in their home
According to McBride, those who have used a home equity line of credit for home improvements may ask their lender if they may change the interest rate on their remaining debt, leading to a fixed-rate home equity loan. If they are denied, they may consider repaying the loan with a HELOC from a different banking institution at a lower promotional rate.