Updated Jun 16, 2022 - Economy

How Americans will feel the squeeze from higher interest rates

Data: Mortgage News Daily; Chart: Axios Visuals
Data: Mortgage News Daily; Chart: Axios Visuals

Mortgages, car loans and credit card debt are all about to get more expensive.

The big picture: The era of dirt-cheap borrowing is over: The Federal Reserve is trying to slam the brakes on the economy, and the cost to borrow is going up as it rushes to contain inflation.

  • Higher borrowing costs may push consumers and businesses to hold back on certain purchases. That will cool off demand, and perhaps put a lid on prices that are rising at the fastest rate in over 40 years.

Catch up quick: The Fed said yesterday it would raise interest rates by three-quarters of a percentage point, the biggest hike since 1994.

  • With that announcement, the Fed has hiked rates by 150 basis points since March to a range of 1.50 and 1.75%. New projections show interest rates may hit 3.4% by the end of this year.

What to watch

Home loans: The rate for a conventional 30-year fixed-rate mortgage now tops 6%, at least by one estimate. This time last year: 3.1%.

Credit card debt: The average credit card rate hit 16.7% — up from 16% last year, according to BankRate. Credit card rates, tied closely to the Fed's moves, are expected to keep rising — squeezing consumers who carry a balance.

Auto loans: Rising interest rates and increasing prices had already pushed the average monthly car payment to an all-time high of $656 for new vehicles and $546 for used rides, per Edmunds.

  • New-car borrowers agreed to an average interest rate of 5.1% in May, up from 4.5% a year earlier and the highest level since March 2020.
  • Automakers and car dealers may be hesitant to let rates go too much higher for fear of chasing away customers, Edmunds executive director of insights Jessica Caldwell said in a written analysis.

The bottom line: Some savers may see at least some relief, in the form of earning a bit more on money parked in savings, depending on the bank. But because inflation is rising far faster than any of those rates, money in savings is still being eroded.

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