How the Fed's rate hikes could affect your finances

Wednesday's rate hike, part of the Fed's drive to curb high inflation, was smaller than its previous four straight three-quarter-point increases. The downshift reflects, in part, the easing of inflation and the cooling of the economy.

As interest rates increase, many economists say they fear that a recession remains inevitable — and with it, job losses that could cause hardship for households already badly hurt by inflation.

Here's what to know:

WHAT'S PROMPTING THE RATE INCREASES?

The short answer: Inflation. Over the past year, consumer inflation in the United States has clocked in at 7.1% — the fifth straight monthly drop but still a painfully high level.

The Fed's goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.

Fed Chair Jerome Powell has acknowledged that aggressively raising interest rates would bring "some pain" for households but that doing so is necessary to crush high inflation.

WHICH CONSUMERS ARE MOST AFFECTED?

Anyone borrowing money to make a large purchase, such as a home, car or large appliance, will take a hit, according to Scott Hoyt, an analyst with Moody's Analytics.

"The new rate pretty dramatically increases your monthly payments and your cost," he said. "It also affects consumers who have a lot of credit card debt — that will hit right away."

That said, Hoyt noted that household debt payments, as a proportion of income, remain relatively low, though they have risen lately. So even as borrowing rates steadily rise, many households might not feel a much heavier debt burden immediately.

"I'm not sure interest rates are top of mind for most consumers right now," Hoyt said. "They seem more worried about groceries and what's going on at the gas pump. Rates can be something tricky for consumers to wrap their minds around."

HOW WILL THIS AFFECT CREDIT CARD RATES?

Even before the Fed's latest move, credit card borrowing rates had reached their highest level since 1996, according to Bankrate.com, and these will likely continue to rise.

And with prices still surging, there are signs that Americans are increasingly relying on credit cards to help maintain their spending. Total credit card balances have topped $900 billion, according to the Fed, a record high, though that amount isn't adjusted for inflation.

John Leer, chief economist at Morning Consult, a survey research firm, said its polling suggests that more Americans are spending down the savings they accumulated during the pandemic and are using credit instead. Eventually, rising rates could make it harder for those households to pay off their debts.

Those who don't qualify for low-rate credit cards because of weak credit scores are already paying significantly higher interest on their balances, and they'll continue to.

As rates have risen, zero percent loans marketed as "Buy Now, Pay Later" have also become popular with consumers. But longer-term loans of more than four payments that these companies offer are subject to the same increased borrowing rates as credit cards.

For people who have home equity lines of credit or other variable-interest debt, rates will increase by roughly the same amount as the Fed hike, usually within one or two billing cycles. That's because those rates are based in part on banks' prime rate, which follows the Fed's.

HOW ARE SAVERS AFFECTED?

The rising returns on high-yield savings accounts and certificates of deposit (CDs) have put them at levels not seen since 2009, which means that households may want to boost savings if possible. You can also now earn more on bonds and other fixed-income investments.

Though savings, CDs, and money market accounts don't typically track the Fed's changes, online banks and others that offer high-yield savings accounts can be exceptions. These institutions typically compete aggressively for depositors. (The catch: They sometimes require significantly high deposits.)

In general, banks tend to capitalize on a higher-rate environment to boost their profits by imposing higher rates on borrowers, without necessarily offering juicer rates to savers.

WILL THIS AFFECT HOME OWNERSHIP?

Last week, mortgage buyer Freddie Mac reported that the average rate on the benchmark 30-year mortgage dipped to 6.33%. That means the rate on a typical home loan is still about twice as expensive as it was a year ago.

Mortgage rates don't always move in tandem with the Fed's benchmark rate. They instead tend to track the yield on the 10-year Treasury note.

Sales of existing homes have declined for nine straight months as borrowing costs have become too high a hurdle for many Americans who are already paying much more for food, gas and other necessities.

WILL IT BE EASIER TO FIND A HOUSE IF I'M STILL LOOKING TO BUY?

If you're financially able to proceed with a home purchase, you're likely to have more options than at any time in the past year.

WHAT IF I WANT TO BUY A CAR?

Since the Fed began increasing rates in March, the average new vehicle loan has jumped more than 2 percentage points, from 4.5% to 6.6% in November, according to the Edmunds.com auto site. Used vehicle loans are up 2.1 percentage points to 10.2%. Loan durations for new vehicles average just under 70 months, and they've passed 70 months for used vehicles.

Most important, though, is the monthly payment, on which most people base their auto purchases. Edmunds says that since March, it's up by an average of $61 to $718 for new vehicles. The average payment for used vehicles is up $22 per month to $565.

Ivan Drury, Edmunds' director of insights, says financing the average new vehicle with a price of $47,000 now costs $8,436 in interest. That's enough to chase many out of the auto market.

"I think we're actually starting to see that these interest rates, they're doing what the Fed wants," Drury said. "They're taking away the buying power so that you can't buy a vehicle anymore. There's going to be fewer people that can afford it."

Any rate increase by the Fed will likely be passed through to auto borrowers, though it will be slightly offset by subsidized rates from manufacturers. Drury predicts that new-vehicle prices will start to ease next year as demand wanes a little.

HOW HAVE THE RATE HIKES INFLUENCED CRYPTO?

Cryptocurrencies like bitcoin have dropped in value since the Fed began raising rates. So have many previously high-valued technology stocks.

Higher rates mean that safe assets like Treasuries have become more attractive to investors because their yields have increased. That makes risky assets like technology stocks and cryptocurrencies less attractive.

Still, bitcoin continues to suffer from problems separate from economic policy. Three major crypto firms have failed, most recently the high-profile FTX exchange, shaking the confidence of crypto investors.

WHAT ABOUT MY JOB?

Some economists argue that layoffs could be necessary to slow rising prices. One argument is that a tight labor market fuels wage growth and higher inflation. But the nation's employers kept hiring briskly in November.

"Job openings continue to exceed job hires, indicating employers are still struggling to fill vacancies," said Odeta Kushi, an economist with First American.

WILL THIS AFFECT STUDENT LOANS?

Borrowers who take out new private student loans should prepare to pay more as as rates increase. The current range for federal loans is between about 5% and 7.5%.

That said, payments on federal student loans are suspended with zero interest until summer 2023 as part of an emergency measure put in place early in the pandemic. President Joe Biden has also announced some loan forgiveness, of up to $10,000 for most borrowers, and up to $20,000 for Pell Grant recipients — a policy that's now being challenged in the courts.

IS THERE A CHANCE THE RATE HIKES WILL BE REVERSED?

It looks increasingly unlikely that rates will come down anytime soon. On Wednesday, the Fed signaled that it will raise its rate as high as roughly 5.1% early next year — and keep it there for the rest of 2023.

___

AP Business Writers Christopher Rugaber in Washington, Tom Krisher in Detroit and Damian Troise and Ken Sweet in New York contributed to this report.

___

The Associated Press receives support from Charles Schwab Foundation for educational and explanatory reporting to improve financial literacy. The independent foundation is separate from Charles Schwab and Co. Inc. The AP is solely responsible for its journalism.