What this means for lending, inflation and growth
The cost of borrowing is rising.
Indeed, the Federal Reserve, the American central bank, on Wednesday raised its key rate by 0.25%, the first increase since 2018. The central bank wants to tame the highest inflation rates that the United States has seen. for 40 years.
The Federal Reserve sets the interest rates that banks charge each other for overnight lending to meet reserve requirements.
This rate, the benchmark federal funds rate, influences the interest that financial institutions charge consumers to make purchases such as homes and cars, and fund student loans and credit cards. When the Fed raises its federal funds rate, trade rates follow the same direction.
Since the start of the pandemic in March 2020, the range of this short-term overnight interbank rate has been 0.0% to 0.25%.
The Fed this week raised the rate by a quarter of one percent, to a range between 0.25% and 0.50%, and signaled that it plans to raise rates up to six more times. This year. The Fed’s key interest rate has been a powerful tool in defining monetary policy. Lowering the rate speeds up the economy by making it cheaper to borrow money while raising rates slows it down.
Only a little now, but some believe the fed funds rate could hit 2% by the end of 2022.
Not everyone agrees on where the Fed will go.
Moody’s isn’t sure the Fed will go beyond 2% “because there is significant uncertainty in the outlook and the Fed’s view of the appropriate path for the fed funds rate may change,” according to a report. March 17 research note. If oil prices continue to soar, for example, the Fed could take a break.
Credit card rates and auto loan interest rates are already high, said Lara Rhame, chief U.S. economist at FS Investments in Philadelphia. “These won’t move as much as loans anchored in the banking system, such as construction and small business loans, 18-month and two-year loans,” Rhame said. “These will rise rapidly as the fed funds rate rises.”
Concerns about inflation and war have displaced worries about the pandemic.
The Fed raised rates to protect the US economy from soaring inflation and rising oil prices due to Russia’s invasion of Ukraine. Higher interest rates can dampen growth, but Fed Chairman Jerome Powell said strong hiring and wages show the U.S. economy is strong enough to withstand increases.
The Fed cut its forecast for GDP growth this year from 4% to 2.8%, but left its forecast for GDP growth in 2023 and 2024 at 1.8%. The jobless rate is expected to fall to 3.5% this year and next, while the Fed forecasts a slight rise to 3.6% in 2024.
The Fed expects inflation to hover around 4.3% this year, falling to 2.7% in 2023 and 2.3% in 2024. According to the latest data from the Labor Department, of the 12 month ending in February, inflation jumped 7.9%.
Some of the factors driving inflation include labor costs, a strong economy, and supply chain issues. “Rate hikes only solve two out of three problems,” Rhame said. Rising oil prices and Russia’s invasion of Ukraine, not reflected in the latest inflation data, continue to put upward pressure on prices.
Most federal student loans have fixed interest rates, and a fixed rate loan would not change, so your interest rate and payment remain the same.
“If you have a federal loan, it doesn’t concern you. Your rate is fixed,” said student loan expert Anna Helhoski.
Private student loans, however, often have variable rates, and “this rate hike immediately affects borrowers in the private market,” said Helhoski, who works for personal finance website and app NerdWallet.
Rising rates add another 0.25% to your student loan interest, she said. A private student lender determines interest rates based on credit history, the school you attend and your program of study, according to the Consumer Finance Protection Bureau.
Your lender should tell you your rates. If you already have a loan, log into your student loan account on your lender’s website or call your service agent for interest rate information.
When federal student loan rates reset in July, away from 10-year Treasury bills, that rate could be higher than today, Helhoski said.
Federal direct loans for undergraduates charge 3.73% through July 1, 2022, 5.28% for graduate loans and 6.28% for Parent Plus loans, according to the Department of Education.
“We don’t know what the rate will be for the 2022-2023 school year,” Helhoski said. Check your current interest rate on the Department of Education website: studentaid.gov/understand-aid/types/loans/interest-rates.
A total of 26.6 million people are expected to resume student loan repayments on May 2 after a pause since March 13, 2020, and government agencies, lawyers and lawmakers could extend further.
Mortgage interest rates are not directly tied to the federal funds rate, but they have nevertheless risen as well.
A 30-year fixed-rate mortgage averaged 4.16% in the week ending March 17, down from 3.85% the previous week, according to data from Freddie Mac on the Federal Reserve website. of St. Louis.
Home prices are up 17% year over year in 2021, Rhame said. “Could that cause house prices to slow down a bit? This will likely happen as mortgage rates rise.
Other factors shape the housing market, she added. “There is still very little supply.”