The Federal Reserve recently raised interest rates by another 0.75%, bringing the federal funds rate to between 3.75% to 4.00%. This is the fourth consecutive three-quarters of a percentage point raise on interest rates and the sixth interest rate hike overall.
These increases are part of an effort by the Fed to lower the inflation rate to 2% from where it currently stands at 8.2%, and they’re expected to continue throughout 2023. Rates are expected to peak anywhere from 4.5% to 4.75% before going down.
The goal of the Fed’s rate hikes is to slow down the economy by making borrowing more expensive, but there’s been debate over whether these hikes are too aggressive. For example, mortgage rates (opens in new tab) just reached their highest level in two decades, soaring past 7%.
Here’s what this additional increase in the Federal Reserve’s rates mean for you and your finances.
Interest rate hike impact: At a glance
- Mortgages: 30-year fixed mortgage rates reached 7.08% in October, the highest they’ve been since 2002. This month, rates are expected to reach 7% to 7.25%.
- Credit cards: The previous interest rate hike, issued in September, caused credit card APRs to jump from 16% to around 18.1%. With this additional 0.75% increase issued by the Fed, APRs will now likely reach 19%.
- Car loans: For a 60-month new car loan, rates will likely increase from 5.63% to 6%. At the beginning of the year, they were 3.86%.
30-year fixed mortgage rates reached 7.08% in October, the highest they’ve been since 2002. This month, rates are expected to reach 7% to 7.25% (opens in new tab) as inflation remains high.
As always, fixed-rate mortgage rates won’t increase, but new mortgages or variable-rate mortgages will, as the latter are determined by the yield on the 10-year Treasury note, which is currently at its highest level since 2011.
These rate increases mean big changes in affordability for many potential homebuyers. For example, a family with a median income of $71,000 could afford a $488,700 home (opens in new tab) with a 20% down payment, if mortgage rates were below 4%. As rates currently stand, around 7%, the same family would only be able to afford a $339,200 home.
Buyers may also start considering adjustable rate mortgages if they don’t plan on living somewhere long term, as initial rates for ARMs are typically lower than those offered on 30-year fixed rate loans.
The previous interest rate hike (opens in new tab), issued in September, caused credit card APRs to jump from 16% to around 18.1%. With this additional 0.75% increase issued by the Fed, APRs will now likely reach 19%. This rise in rates means interest on your credit card balances will be more expensive. Therefore, it’s important to pay off cards and avoid carrying these balances. If you have pre-existing credit card debt, try transferring it to a card with a 0% introductory APR on balance transfers that will allow you to avoid these high interest rates.
The Fed’s decision to increase interest rates means that auto loan rates will rise as well. For a 60-month new car loan, rates will likely increase from 5.63% to 6% (opens in new tab). At the beginning of the year, they were 3.86% (opens in new tab). Not only are interest rates getting higher, but so are car prices, making it even more difficult for people to purchase new vehicles.
For now, you may want to hold off on purchasing a new vehicle. However, if you do plan on buying one, make sure your credit score is as good as possible. Making sure your credit score is high can help you get a better rate on new vehicle purchases and associated credit products. See our how to improve your credit card score (opens in new tab) guide for more info.
Since vehicle prices are rising (opens in new tab) along with interest rates, make sure to shop for the best deals before making a purchase. Keeping interest rates and associated operating costs low can help manage your overall auto expenses during periods of inflation.