Even though the The Federal Reserve did not raise its key rate on Wednesday, the days of low rates are clearly numbered.
Reports of higher than expected inflation allowed the central bank to unwind last year’s bond purchases. While the Fed has said interest rates will stay close to zero for now, lowering bond purchases is seen as the first step on the path to raising interest rates.
This will inevitably have an impact on the prices consumers pay.
In fact, rates are already rising for long-term borrowing costs, said Yiming Ma, assistant professor of finance at Columbia University Business School. “This is likely to continue as the implementation actually starts to happen.”
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The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend each other on a day-to-day basis. While that’s not the rate consumers pay, the Fed’s measures still affect the borrowing and saving rates they see every day.
Since the start of the pandemic, the Fed’s historically low borrowing rates have made it easier to access cheaper and less desirable loans to accumulate cash.
Once the central bank starts implementing its easy money policies, consumers may need to redouble their efforts to protect their purchasing power.
Here’s a breakdown of how it works.
Lending rates will increase
For starters, when the Fed begins to slow the pace of bond purchases, long-term bonds mortgage rates will increase slightly as they are influenced by the economy and inflation.
The 30-year average fixed-rate home loan has already reached 3.24%, according to Bankrate.
“If they haven’t already, the time may still have come for some borrowers to consider refinancing,” said Jacob Channel, senior economic analyst at LendingTree. “Even if the rates go up, they remain relatively low from a historical point of view.
“Nonetheless, the window for refinancers to obtain a rate below 3% is closing quickly.”
Currently, refinance borrowers with a good credit rating can expect to see APRs of around 2.85% for a 30-year fixed rate refinance loan and 2.31% for a fixed rate loan. over 15 years, according to a loan tree.
Once the federal funds rate rises, the prime rate will also rise, and homeowners with adjustable rate mortgages or home equity lines of credit, which are indexed to the prime rate, could also be affected.
But that’s not all bad news, Channel added. “Higher rates could help dampen housing demand somewhat, which could lead to less dramatic growth in house prices, with homes staying on the market longer and less bidding wars,” he said. he declares.
“It may actually make it easier for some home buyers – like first-time buyers – to enter the housing market.”
And it may still be some time before home equity lines of credit rates, which stand at 3.87%, recover from current “very low and very attractive levels”, Greg added. McBride, Chief Financial Analyst at Bankrate.com.
“It will take a succession of interest rate hikes before the cumulative effect on rates diminishes attractiveness.”
Anyone who buys a car will see a similar trend with auto loans. The average five-year new auto loan rate is as low as 3.87%, while the four-year used auto loan average rate is 4.52%, according to Bankrate.
Other types of short-term borrowing rates, especially on credit cards, are also still cheap by historical standards.
Credit card rates are now 16.31%, down from 17.85%, according to Bankrate, but most credit cards have a variable rate, which means there is a direct link to the index benchmark, and when the Fed raises short-term rates, credit card rates will follow.
“Rates won’t stay this low forever,” said Matt Schulz, chief credit analyst for LendingTree. “This is why it is very important for people with credit card debt to focus now on paying off as soon as possible.”
The good news here is that zero percent balance transfer offers are back in force, he added. Cards offering 15, 18, and even 21 months with no interest on transferred balances are easy to find and banks are eager to lend, Schulz said.
Savers are in a hurry
The Fed has no direct influence on deposit rates; however, these tend to be correlated with changes in the target federal funds rate. Therefore, the rate of savings accounts at some of the largest retail banks hovers near the rock bottom, currently only 0.06% on average.
Because the inflation rate is higher than savings account rates, savings money loses purchasing power over time.
Moreover, even when the Fed raises its benchmark rate, deposit rates are much slower to respond.
“Based on the history from 2015 to 2017, no significant increase in savings account rates is expected until the Fed is well engaged in its rate hikes,” said the founder of DepositAccounts .com, Ken Tumin.
“For consumers who are depositing, it’s good to pay attention to other options,” Columbia’s Ma advised, “such as” money market funds, bond mutual funds or bond ETFs. “
There are alternatives that will require taking more risk but come with increasing returns, she said.
“This is especially important to consider as we enter a cycle of rate hikes at some point.”