The Federal Reserve is expected to raise its federal funds rate in the coming months by a half-percent in an attempt to combat soaring inflation, largely caused by the effects of the coronavirus pandemic.
Upping that all-important rate, which had long been near zero, is one of the tools the Fed has used in the fight against worrisome inflation. On May 11, the Consumer Price Index showed that prices jumped 8.3% in April, compared with the same month in 2021.
The increase means borrowers will pay more for products like mortgages, car loans and credit card debt. In Las Vegas, where the median price for a single-family home was a record $475,000 in April, now would be a good time for homeowners to brush up on their mortgage paperwork, said David Herpers, a senior vice president and head of digital banking for Credit One Bank.
“People with existing loans will be immune to [rising interest rates] for the most part,” Herpers said. “But those with an ARM (adjustable-rate mortgage), about 10% of all those with mortgages, will see their rate rise. That will definitely happen.”
Herpers said auto loan rates—generally always fixed-rate agreements—will also go up.
“For someone who has an auto loan, I would just stick with it,” Herpers said. “Many don’t realize this, but there are a lot of banks out there that will refinance an auto loan. In this climate, though, it’s likely that whatever a bank would offer a person now would be more expensive than what they already have.”
On the bright side for consumers, bank savings rates will also likely go up, though Herpers said some banks can wait a long time before offering those increased rates once the federal funds rate begins to climb.
“Most consumers do have some savings,” Herpers said. “For those who do, it can make a lot of sense to find a bank—often internet-based banks—offering a higher interest rate. As a hedge against all this, I would recommend that consumers seek out a place for those savings to sit, so they can earn at least some amount of interest.”
During a talk at UNLV in April, Mary Daly, president of the Federal Reserve Bank of San Francisco, said the Fed would likely embark on an “expeditious march to neutral” by the end of the year. Neutral, Daly said, is considered to be 2.5%.
Mark Vitner, a Wells Fargo economist focusing on the Las Vegas market, said his employer forecasts the federal funds rate to rise to 3.75% by sometime next year. Despite the predicted increases, Vitner said bigger concerns for many consumers will likely continue to be high housing costs and gasoline prices.
“When the Fed increases rates to battle inflation, it will take a year to 18 months until [we] will see any payoff,” Vitner said. “It’s going to cause a little more pain for consumers, say if they have a home equity credit line. That will adjust upward. Auto loan rates will be impacted, but I think that will be minimal.”
The short-term pain, Vitner said, is necessary.
“Inflation has heated up to the point where it’s now squeezing household budgets and wiping out income gains,” Vitner said. “Unfortunately, I think we’re going to have to deal with the higher interest rates and the high inflation for at least the next few months.”
In early May, the Federal Reserve Bank of New York’s Center for Microeconomic Data released a quarterly report showing that total household debt in the U.S. jumped about 1.7%—to $15.84 trillion—during the first three months of 2022 when compared with the same period last year.
Credit card balances, the report showed, are now $71 billion higher than what data showed for the first quarter of 2021.
The average credit card interest rate is around 16.5%, said Ted Rossman, a credit card industry analyst for Bankrate.com. He expects that figure to rise to around 19% by the end of the year.
The average credit card balance, according to Experian, is about $5,500.
“About half of all Americans have credit card debt,” Rossman said. “Half of those people have been in debt for at least a year, so there are a lot of people affected by this. Credit card debt is already very pricey, so whatever consumers can to pay theirs down, that’s going to be beneficial.”
Rossman said it pays to know as much as one can about their financial situation and options.
One bright spot, he said, is the robust labor market. Jobs are plentiful and employers across many industries are on the hunt for human capital. “There needs to be constant reassessment now because things have been pretty dynamic,” Rossman said. “With higher interest rates, ultimately that’s supposed to be the cure for inflation, but it depends. Borrowers with variable-rate debt will be squeezed more now.”
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