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Wednesday, May 25, 2022

How the Fed hike could affect mortgage, car loan, card rates

Will mortgage rates rise? How about car loan? Credit Card?

How about those almost invisible rates on bank CDs – any chance to get a few dollars more?

The Federal Reserve indicated on Wednesday that it will begin raising its benchmark interest rate as early as March — and perhaps a few additional times this year — that consumers and businesses will finally feel it.

With the Fed thinking that the US job market has essentially returned to normal and inflation is well ahead of the central bank’s annual 2% target, it is time to raise its benchmark rate above zero.

The Fed slashed its key rate two years ago after the pandemic slowdown. The idea was to support the economy by encouraging borrowing and spending. But now, by making loans more and more expensive, the Fed hopes to stop rising prices squeezing consumers and businesses.

Here are some questions on what this could mean for consumers and businesses.

Will Mortgage Rates Continue to High?

Maybe, but it’s hard to say. Mortgage rates usually do not increase with the Fed’s rate increase. Sometimes they even walk in the opposite direction. Long-term mortgages track the rate on 10-year Treasuries, which, in turn, is affected by a variety of factors. These include investor expectations for future inflation and global demand for US Treasuries.

When inflation is expected to remain high, investors sell Treasuries because the returns on those bonds offer no return once you account for inflation. As this happens, selling pressure on bonds forces the Treasury to pay higher rates. After that the returns increase. The result can be higher mortgage rates. but not always.

So will the home loan not increase soon?

Not necessary. Inflation is well above the Fed’s 2 percent target. Fewer investors are buying Treasuries as a safe haven. And with many Fed rate hikes expected, the rate on the 10-year note could rise over time — and so, by extension, would increase mortgage rates.

It’s hard to say right now when.

On the other hand, even when Treasury yields are comparatively lower than inflation as they are now, investors often turn to them. This is especially true in times of global turmoil. Nervous investors around the world often put money in Treasuries because they are considered ultra-safe. All that buying pressure keeps a lid on Treasury rates, which generally has the effect of keeping mortgage rates relatively low.

What about other types of loans?

For users of credit cards, home equity lines of credit, and other variable-interest loans, rates will increase at the same rate as the Fed hikes. That’s because those rates are based on the banks’ prime rate, which moves in conjunction with the Fed.

Those who do not qualify for such low-rate credit card offers may end up paying higher interest on their balances, as the rates on their cards will go up as the prime rate.

The Fed’s rate hike does not necessarily raise auto loan rates. Car loans are more sensitive to competition, which can slow the rate of growth.

CDs and Money-Market Accounts?

Savings, certificates of deposit, and money market accounts typically do not track the Fed’s changes. Instead, banks capitalize on the high rate environment to try to thicken their profits. They do this by imposing higher rates on borrowers, without necessarily providing any juicer rates to savers.

Exception: Banks with high-yield savings accounts. These accounts are known to compete aggressively for depositors. The only catch is that they usually require significant deposits.

World Nation News Deskhttps://www.worldnationnews.com
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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