Mortgages, car loans and credit card debt are about to get more expensive.
The big picture: The era of cheap borrowing is over: the Federal Reserve is trying to rein in the economy, and the cost of borrowing is rising as it rushes to contain inflation.
- Higher borrowing costs could cause consumers and businesses to withhold certain purchases. This will cool demand and possibly put a damper on prices that are rising at the fastest rate in over 40 years.
Catch up fast: The Fed announced yesterday that it would raise interest rates by three-quarters of a percentage point, the biggest hike since 1994.
- With this announcement, the Fed has raised rates by 150 basis points since March to a range of 1.50 and 1.75%. New projections show that interest rates could reach 3.4% by the end of this year.
What to watch
Home loans: The rate on a conventional 30-year fixed-rate mortgage is now over 6%, at least by one estimate. This time last year: 3.1%.
Credit card debt: The average credit card rate rose to 16.7% from 16% last year, according to BankRate. Credit card rates, closely tied to Fed measures, are expected to continue to rise, compressing consumers with balances.
Car loans: Rising interest rates and rising prices had already pushed the average monthly car payment to an all-time high of $656 for new vehicles and $546 for used rides, according to Edmunds.
- New car borrowers accepted an average interest rate of 5.1% in May, down from 4.5% a year earlier and the highest level since March 2020.
- Automakers and car dealerships may be reluctant to let rates climb too high for fear of driving away customers, said Jessica Caldwell, executive director of Edmunds, in a written analysis.
The bottom line: Some savers may see at least some relief, in the form of earning a bit more on the money placed in savings, depending on the bank. But since inflation is rising much faster than any of these rates, the savings money continues to erode.