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The Federal Reserve's period of rate hikes may be over. Here's why consumers are still reeling

Richmond Fed President Tom Barkin: Disconnect between consumer data and what I hear on the ground

The Federal Reserve announced it will leave interest rates unchanged Wednesday, in a move that many believe will conclude the central bank’s rate hike cycle and set the stage for rate cuts in the year ahead.

The Fed has raised interest rates 11 times since March 2022 — the fastest pace of tightening since the early 1980s. The spike in interest rates caused consumer borrowing costs to skyrocket while inflation remained elevated, putting many households under pressure.

Although the central bank indicated it will continue to pursue its 2% inflation target, “the real question at this stage is when they’ll begin cutting,” said Columbia Business School economics professor Brett House.

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The federal funds rate, which is set by the U.S. central bank, is the interest rate at which banks borrow and lend to one another overnight. Although that’s not the rate consumers pay, the Fed’s moves still affect the borrowing and savings rates they see every day.

Here’s a look back at how the central bank’s rate hike cycle affected everything from mortgage rates and credit cards to auto loans and student debt, and what may happen to borrowing costs next.

Credit card rates jumped to nearly 21% from 16%

Most credit cards come with a variable rate, which has a direct connection to the Fed’s benchmark rate.

After the previous rate hikes, the average credit card rate rose from 16.34% in March 2022 to nearly 21% today — an all-time high.

Between high inflation and record interest rates, consumers will end the year with $100 billion more in credit card debt, according to data from WalletHub. Not only are balances higher, but more cardholders are carrying debt from month to month.

Going forward, APRs aren’t likely to improve much. Credit card rates won’t come down until the Fed starts cutting and even then, they will only ease off extremely high levels, according to Greg McBride, chief financial analyst at Bankrate.

“Credit card debt is high-cost debt in any environment but that’s particularly true now and that’s not going to change,” he said.

Mortgage rates hit 8%, up from 3.2%

Although 15-year and 30-year mortgage rates are fixed, and tied to Treasury yields and the economy, anyone shopping for a new home lost considerable purchasing power, partly because of inflation and the Fed’s period of policy tightening.

In fact, 2023 was the least affordable homebuying year in at least 11 years, according to a report from real estate company Redfin.

“Mortgage rates rocketed higher from record lows to more than 20-year highs,” McBride said.

After hitting 8% in October, the average rate for a 30-year, fixed-rate mortgage is currently 7.23%, up from 4.4% when the Fed started raising rates in March of 2022 and 3.27% at the end of 2021, according to Bankrate.

A “For Sale” sign outside a house in Edmonton, Alberta, in Canada on Oct. 22, 2023.

Nurphoto | Nurphoto | Getty Images

Already, though, housing affordability is showing signs of improvement heading into the new year.

“Market sentiment has significantly shifted over the last month, leading to a continued decline in mortgage rates,” said Sam Khater, Freddie Mac’s chief economist. “The current trajectory of rates is an encouraging development for potential homebuyers,” he added, kickstarting a “modest uptick in demand.”

McBride also expects mortgage rates to ease in 2024 but not return to their pandemic-era lows. “You are still looking at rates in the 6s, not rates in the 3s or 4s,” he said.

Auto loan rates surpassed 7%, up from 4%

Even though auto loans are fixed, car prices had been rising along with the interest rates on new loans, leaving more consumers facing monthly payments that they could barely afford.

The average rate on a five-year new car loan is now 7.72%, up from 4% when the Fed started raising rates, according to Bankrate.

“The largest segment of consumers financing a new car today has a 7.9% APR,” said Ivan Drury, Edmunds’ director of insights. “That’s a far cry from those spring 2020 pandemic deals of 0% financing for 84 months that drove significant sales of large trucks and SUVs.”

But despite high interest rates, vehicle affordability is improving, with new car prices decreasing year over year and sales incentives increasing.

“The new-vehicle market is shifting to a buyer’s market, not a seller’s market,” according to Cox Automotive research.

Federal student loans are at 5.5%, up from 3.73%

Federal student loan rates are also fixed, so most borrowers weren’t immediately affected by the Fed’s moves. But undergraduate students who took out new direct federal student loans this year are paying 5.50%, up from 4.99% in the 2022-23 academic year and 3.73% in the 2021-22 academic year.

Private student loans tend to have a variable rate tied to the prime, Treasury bill or another rate index, which means those borrowers are paying even more in interest. How much more, however, varies with the benchmark.

Now that federal student loan payments have restarted after a three-year reprieve, interest is also accruing again, and the transition back to payments has proved painful for many borrowers.

However, if the Fed cuts rates in 2024, that may open the door to some refinancing opportunities, which could help.

High-yield savings rates topped 5%, up from 1%

While the Fed has no direct influence on deposit rates, the yields tend to be correlated to changes in the target federal funds rate.

The savings account rates at some of the largest retail banks, which were near rock bottom during most of the Covid-19 pandemic, are currently up to 0.46%, on average, according to the Federal Deposit Insurance Corporation.

Top-yielding online savings account rates have made more significant moves and are now paying over 5% — the most savers have been able to earn in nearly two decades — up from around 1% in 2022, according to Bankrate.

Even though those rates are peaking, “from a savings standpoint, 2024 is still going to be a really good year for savers because inflation is likely to decline faster than the yields on savings accounts,” McBride said.

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