The Covid era of free money is over.
After the Fed’s historic rate hike on Wednesday, Americans will start to see higher borrowing costs.
Every time the Fed raises rates, it becomes more expensive to borrow. That means higher interest costs for mortgages, home equity lines of credit, credit cards, student debt and auto 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 increases have already pushed rates higher: A 30-year fixed-rate mortgage averaged 5.1% in the week ending April 28, a sharp increase from less than 3% in November.
Higher mortgage rates will make it harder to afford home prices that have skyrocketed during the pandemic. That weaker demand could cool home prices.
On the plus side, cash deposited in bank accounts will eventually earn something (although not much).
For savers, money stashed away in savings, CDs, and money market accounts earned next to nothing during Covid (and for much of the last 14 years, for that matter). Measured against inflation, savers have lost money. But these savings rates will rise as the Fed raises interest rates. Savers will start earning interest again.
But this takes time to develop. In many cases, especially with traditional accounts at large banks, the impact will not 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 start to reduce inflation. Even then, inflation will remain subject to developments from the war in Ukraine, supply chain disarray and of course Covid. read more