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Will mortgage rates rise? What about car loans? credit cards?
How about those almost invisible installments on bank CDs – any chance of getting a few extra bucks?
After the Federal Reserve signaled on Wednesday that it will start raising interest rates as early as March — and likely a few more times this year — consumers and businesses will finally feel the effects.
With the US job market essentially back to normal and inflation rising well above the central bank’s annual target of 2%, the Fed believes it is time to raise interest rates from near zero.
The Fed cut interest rates after the pandemic recession broke out two years ago. The idea was to support the economy by encouraging borrowing and spending. But now, by gradually making credit more expensive, the Fed is hoping to curb the soaring rates that have been squeezing consumers and businesses.
Here are some questions about what this could mean for consumers and businesses.
I AM CONSIDERING BUYING A HOUSE. WILL MORTGAGE RATES GO STEADY HIGHER?
Probably, but it’s hard to say. Mortgage rates don’t usually rise at the same time as Fed rate hikes. Sometimes they even move in the opposite direction. Long-term mortgages are typically based on the 10-year government bond rate, which in turn is affected by a variety of factors. These include investor expectations for future inflation and global demand for US Treasuries.
When inflation is expected to remain high, investors tend to sell government bonds because the yields on these bonds typically offer little to no yield after accounting for inflation. The selling pressure on bonds tends to force government bonds to pay higher interest rates. In response, yields rise. The result can be higher mortgage interest rates. But not always.
Does that mean home equity interest rates won’t be rising much anytime soon?
Not necessarily. Inflation is well above the Fed’s 2 percent target. Fewer investors are buying Treasuries as a safe haven. And with numerous rate hikes expected from the Fed, the interest rate on the 10-year note could rise over time – and with it, mortgage rates.
It’s just hard to say when.
On the other hand, even when government bond yields are comparatively low relative to inflation, as they are now, investors often still flock to them. This is especially true in times of global turbulence. Nervous investors from around the world often put money in Treasuries because they are considered ultra-safe. All of this buying pressure tends to keep Treasury rates in check, which generally keeps mortgage rates relatively low.
WHAT ABOUT OTHER TYPES OF LOANS?
For users of credit cards, home equity loans, and other adjustable-rate debt instruments, interest rates would rise by about the same amount as the Fed hike. That’s because these interest rates are based in part on the bank’s policy rate, which moves in tandem with the Fed.
Those who do not qualify for such cheap credit card offers may have to pay higher interest on their balances as the interest on their cards would rise with the prime rate.
The Fed’s interest rate hikes won’t necessarily increase interest rates on auto loans. Auto loans tend to be more sensitive to competition, which can slow the rate of growth.
WOULD I FINALLY EARN MORE THAN ME WITH CDS AND MONEY MARKET ACCOUNTS?
Probably, although it would take time.
Savings deposits, certificates of deposit, and money market accounts do not typically track changes from the Fed. Instead, banks tend to capitalize on a higher interest rate environment to try to increase profits. They do this by charging borrowers higher interest rates without necessarily offering savers juicing rates.
Exception: Banks with high-yield savings accounts. These accounts are known to aggressively compete for depositors. The only catch is that they usually require significant deposits.
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