Five ways the Fed interest rate hike will impact Americans’ wallets

The Federal Reserve is showing no signs of letting up in its aggressive fight to combat rising prices, tightening wallets as it hikes interest rates at the fastest pace in decades to get a handle on red-hot inflation.

The central bank bumped its baseline interest rate range on Wednesday by another 75 basis points. The Fed raised rates by the same amount last month in a bid to counter soaring costs, marking its first rate hike of that magnitude in nearly thirty years.

Raising rates is the Fed’s primary tool to combat rising inflation as it seeks to tamp down demand by making it harder for consumers to borrow. But the actions taken by the Fed in recent months has fueled concern among some economists of a looming recession.

Here are five ways the rising rates will impact Americans.

Higher mortgages rates 

Americans are already seeing higher mortgage rates as financial markets have tried to anticipate the Fed’s response to rising inflation.

“The effect of a 0.75% rate increase on mortgage and credit card interest rates is probably already baked in – both have risen in recent months and it’s the most-obvious way rate increases affect households,” Josh Bivens, research director at the Economic Policy Institute, said.

U.S. mortgage rates have sharply increased in recent months, adding more hurdles for prospective homebuyers struggling to break into a housing market in which prices soared during the pandemic.

Michael Neal, principal research associate for the Housing Finance Policy Center at the Urban Institute, said mortgage rates have been “rising since the end of last year,” partly reflecting the actions taken by the central bank.

Neal said higher mortgage rates could discourage people from buying homes, as well as homeowners from refinancing.

“You refinance to lower your mortgage rate or you refinance to take out your equity. So, refinancing to lower your mortgage rate is basically off the table if, because of federal monetary policy, mortgage rates are rising,” Neal said.

“In addition, you may still want to take out equity,” he added.  “But taking out equity could become more expensive if interest rates are higher.”

More bang for your savings

Rate hikes often mean higher credit card rates as the Fed tries to cool off demand by making it more expensive for Americans to borrow money.

Consumer price data released by the Labor Department showed inflation surged last month, rising to 1.3 percent in June and 9.1 percent annually, the highest year-on-year increase since 1981.

Experts are hopeful the recent hikes will ease pressure on prices by making Americans spend less. But, in turn, they say Americans also will see an incentive to save money.

“If you have money in a money market fund, those rates kind of go up automatically,” said David Wessel, director of the Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution.

“Some banks have raised their rates that they pay on savings accounts and [certificates of deposit, or CDs], some haven’t. But over time, the rates that people get on their savings will go up,” Wessel added.

Car loans cost more

Experts named auto loans among the list of debts consumers are likely to pay more on following the Fed’s interest rate hike.

“The most immediate effect of short term moves like this is on the rates that people pay on their car loans, which are up about a percentage point over the last seven months,” Wessel said.

“A big increase means they pay more,” he added. “Of course, if you have a small loan, it doesn’t matter, if you have a big loan that matters a lot.”

Data released by Cox Automotive and Moody’s Analytics’ Vehicle Affordability Index (VAI)  in June showed that the estimated typical monthly payment rose to $712 the month before.

The figure was a high watermark, the report found, which also noted new-vehicle affordability has been taking a hit, as “increases in interest rates and vehicle prices outpacing income growth.”

Unemployment could rise

Higher interest rates could lead to rising unemployment in the months ahead, experts say, underlining one of the most difficult challenges the Fed faces in its effort to tackle climbing inflation.

“If higher interest rates lead to less spending by both households and businesses, this could reduce the pace of economic growth and soften the labor market – maybe even putting some upward pressure on the unemployment rate,” Bivens said.

The labor market has so far remained strong, adding over 370,000 jobs last month, with a low unemployment rate of just 3.6 percent. However, as the Fed kicks up interest rates to lower inflation, layoffs have also been on the rise.

“The Fed knows basically, they’re not saying this, but basically, they think unemployment is too low,” Wessel said. “And that’s causing prices, wages to go up too much.”

“So, they’re trying to raise unemployment a little bit, and the reason people worry about a recession is that it’s really hard to do something a little bit. Chances are you overdo it or underdo it,” he added.

Ask for that raise soon

With the Fed expected to keep its foot on the gas pedal in the coming months, now could be the best time to ask for a pay boost. 

“Right now, there is a lot of demand for workers and there are a lot of unfilled jobs. So, it’s a good time to ask for a raise,” Wessel said. “If the Fed succeeds in slowing demand in the economy and employers start worrying about a recession, then that could change.”

Biven also warned of potential consequences if the Fed is too aggressive in raising rates.

“If this happens, some people will lose jobs, others will lose hours of work, and millions will find it harder to wring wage increases out of their employers,” Bivens said. 

“This is the big potential macroeconomic effect, and it is by far the largest potential damage that higher rates could cause typical households.”

Sylvan Lane contributed.