The Covid era of free money is over.
After the Fed’s historic rate hike on Wednesday, Americans will begin to see higher borrowing costs.
Every time the Fed raises rates, it becomes more expensive to borrow. This means higher interest costs on mortgages, home equity lines of credit, credit cards, student debt and car loans. Business loans will also be more expensive, for businesses large and small.
For most Americans, the most tangible way this is playing out is with mortgages, where expectations of rate hikes have already pushed rates higher: A 30-year fixed-rate mortgage averaged 5.1% in the week ending April 28, up sharply from 3% in November.
Higher mortgage rates will make it harder to afford home prices that have skyrocketed during the pandemic. This weaker demand could cool house prices.
On the other hand, cash in bank accounts will eventually earn something (though not much).
For savers, money tucked away in savings, certificates of deposit (CDs) and money market accounts earned next to nothing during Covid (and much of the last 14 years, for that matter). Adjusted for inflation, savers have lost money. But those savings rates will rise as the Fed raises interest rates. Savers will start earning interest again.
But that takes time to play out. In many cases, especially with traditional accounts at large banks, the impact won’t be felt overnight. And even after several rate hikes, savings rates will remain very low, below inflation.
The high cost of living is causing financial headaches for millions of Americans, and it will be a while before the Fed’s interest rate hikes begin to reduce inflation. Even then, inflation will still be subject to developments in the war in Ukraine, the supply chain disaster and, of course, Covid. Read more