Latest news: Wall Street says the Fed is about to raise rates
Earlier this year, the Federal Reserve resorted to its most powerful weapon – raising interest rates – to combat spiraling inflation. But with consumer prices only accelerating since then, Wall Street analysts say consumers and investors should brace for an even bigger increase this week as central bankers try to tame the nation’s sharpest bout of inflation in 40 years.
The Federal Reserve, which will announce its decision on Wednesday at 2 p.m. According to analysts at TD Macro, Eastern Time could raise interest rates by 0.75%. That will come after announcing a 0.25% increase in March and a 0.5% move in May – with the latter posting the largest increase since 2000.
Three-quarter point increase
If the Fed decides on a three-quarter point increase, it would be the first rate hike of that size since 1994. Analysts at Deutsche Bank said in a report on Tuesday that they expect a 0.75% rise at central bank meetings this week and in July; this confirms what they described as a “need for speed” in curbing inflation.
Economists say speed is a key element in the fight against inflation. The Consumer Price Index, a broad basket of goods and services used to track inflation, rose 8.6% in May, from an 8.3% annual rate in April. Gasoline prices have continued to hit new highs almost daily amid the exhaustion of domestic production and the Russian war in Ukraine, while food and housing costs are also on the rise.
Sure, some Wall Street analysts still expect a modest increase in interest rate hikes on Wednesday, but others are adjusting their economic forecasts to take into account a sharper monetary tightening. By the end of the year, the federal funds rate — the rate that determines interbank borrowing — could be nearly double the pre-pandemic level of about 2%, according to forecasts.
Here’s what the Fed rate hike might mean for your wallet
To raise the price, what will it cost you?
Each 0.25% increase in the Fed’s benchmark interest rate translates to an additional $25 per year in interest on $10,000 of debt. So an increase of 0.75% means an additional $75 in interest for every $10,000 of debt.
Economists expect the Federal Reserve to continue raising interest rates throughout the year while battling inflation. Some analysts now expect the central bank to announce another 0.75% increase in July, followed by two 0.5% increases in September and November.
By early 2023, the federal funds rate could be from 3.75% to 4%, according to TD Macro. This means a rate increase of at least 2.75% above the current fed funds rate of 1%. For consumers, that means they can pay an additional $275 in interest for every $10,000 of debt.
How can it affect the stock market?
The stock market has fallen this year amid various headwinds, including the impact of higher inflation and Fed monetary tightening. But Crisavoli said a larger-than-expected rate hike on Wednesday “could be welcomed by equities”.
It would, he noted, would represent the strong signal from [Fed Chairman Jerome Powell], helping the Fed take back control of the policy narrative and clamp down on the massive change in tightening expectations.
Credit Cards and Equity Lines of Credit
Credit card debt will become more expensive, as higher annual interest rates hit borrowers through one or two billing cycles after the Fed’s announcement, according to LendingTree credit expert Matt Schulze. For example, after the Fed’s March increase, credit card rates rose for three-quarters of the 200 cards that Schulze reviews each month.
Schulz said consumers with balances may want to consider a 0% balance transfer credit card or a low-interest personal loan. Consumers can also ask their credit card companies for a lower rate, which research has often shown to be successful.
Adjustable rate credit may also see an impact, including home ownership lines of credit and adjustable rate mortgages, which are based on the base rate.
What is the effect on mortgage rates?
Mortgage rates have already risen in response to the Federal Reserve’s rate hikes this year. The average 30-year mortgage was 5.23% on June 9, according to Freddie Mac. That’s up from 2.96% in the previous year.
This adds thousands to the annual cost of purchasing a property. For example, a buyer who buys a $250,000 home with a 30-year fixed loan will pay about $3,600 more annually than they would have paid the previous year.
Jacob Channel, chief economist at LendingTree, said in an email that the upcoming Fed rate hike may already be felt in existing mortgage rates.
He noted that a rate hike by the Federal Reserve may not mean that the mortgage rates will rise significantly.
The housing market reflects one part of the economy where an increase in the Federal interest rates is slowing demand. The channel added: These high rates have significantly reduced the borrower’s desire to the refinance existing loans, and they are showing signs of lower demand for mortgages as well.
Savings accounts and CDs
When it comes to higher interest rates, the bright side for consumers is better returns from savings accounts and certificates of the deposit.
He noted that in May, the typical return for an online savings account increased from 0.54% to 0.73%, while the average return on a one-year online CD increased from 1.70% to 2.53%.
This is better than savers that used to earn, but it’s still well below the rate of inflation. This means that savers are essentially eroding the value of their money by putting it into a savings account while inflation exceeds 8%.