How Fed hikes could affect mortgages, auto loans and card rates
WASHINGTON — Will mortgage rates go up? How about car loans? Credit card?
How about those almost invisible rates on bank CDs – a chance to get a few extra bucks?
With the Federal Reserve signaling on Wednesday that it will begin raising its benchmark interest rate as early as March — and likely a few more times this year — consumers and businesses will eventually feel it.
The Fed believes that with the U.S. labor market essentially back to normal and inflation well above the central bank’s 2% annual target, now is the time to raise its benchmark rate to near zero.
The Fed had lowered its key rate after the outbreak of the pandemic recession two years ago. The idea was to support the economy by encouraging borrowing and spending. But now, by making loans incrementally more expensive, the Fed hopes to stem the price spike that has weighed on consumers and businesses.
Here are some questions about what this could mean for consumers and businesses.
I AM PLANNING TO BUY A HOUSE. WILL MORTGAGE RATES RISE REGULARLY?
Probably, but it’s hard to say. Mortgage rates generally don’t go up at the same time as Fed rate hikes. Sometimes they even move in the opposite direction. Long-term mortgages tend to follow the 10-year Treasury rate, which, in turn, is influenced by various 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 Treasuries as the yields on these bonds tend to provide little or no return once you factor in inflation. When this happens, the selling pressure on bonds tends to force Treasuries to pay higher rates. Yields then increase in response. The result can be higher mortgage rates. But not always.
DOES THIS MEAN HOME LOAN RATES WON’T INCREASE A LOT SOON?
Not necessarily. Inflation is well above the Fed’s 2% target. Fewer and fewer investors are buying Treasury bonds as a safe haven. And with many Fed rate hikes expected, the rate on the 10-year note could rise over time – and thus, by extension, mortgage rates.
It’s just hard to say when.
On the other hand, even when Treasury yields are relatively low relative to inflation, as they are now, investors often flock to them. This is especially true in times of global turmoil. Nervous investors around the world often pour money into treasury bills because they are considered ultra-safe. All of this buying pressure tends to keep Treasury rates capped, which generally has the effect of keeping mortgage rates relatively low.
WHAT ABOUT OTHER TYPES OF LOANS?
For users of credit cards, home equity lines of credit and other variable-interest debt, rates would rise by roughly the same amount as the Fed hike. That’s because those rates are based in part on the banks’ prime rate, which moves in tandem with the Fed.
Those who don’t qualify for such low-rate credit card offers might end up paying higher interest on their balances because their card rates would increase along with the prime rate.
Fed rate hikes will not necessarily increase auto loan rates. Auto loans tend to be more susceptible to competition, which can slow the rate of increases.
WILL I FINALLY EARN A BETTER RETURN THAN MEASY ON CDS AND MONEY MARKET ACCOUNTS?
Probably, even if it would take time.
Savings, certificates of deposit and money market accounts generally do not follow Fed changes. Instead, banks tend to take advantage of a higher rate environment in an attempt to boost their profits. They do this by charging higher rates to borrowers, without necessarily offering lower rates to savers.
The exception: banks with high-yield savings accounts. These accounts are known for their aggressive competition for depositors. The only problem is that they usually require large deposits.