Biggest winners and losers from the Fed’s interest rate hike

Raw Text

Bankrate

264

James Royal

·

8 min read

The Federal Reserve announced that it’s raising interest rates by 0.25 percentage point , following its July 25-26 meeting, boosting the federal funds rate to a target range of 5.25 to 5.5 percent. With the move, the Federal Reserve has now raised rates a total of 11 times during this economic cycle in an effort to significantly reduce liquidity to the financial markets and tamp down high inflation.

The Fed’s decision comes as inflation dropped to 3 percent year-over-year in June , after hitting the highest levels in decades at over 9 percent in mid-2022. Projections show an additional rate hike could be on the way before the end of the year if conditions warrant. At its last meeting, the central bank declined to raise rates, breaking a string of 10 straight meetings where it had hiked rates.

“The Fed paused their interest rate hikes in June, but this month they’re back at it, raising interest rates for the eleventh time in the past 12 meetings,” says Greg McBride, CFA, Bankrate chief financial analyst. “Core inflation is stubbornly high and progress has been slow. The strength in the labor market and resilience of the overall economy are why the Fed is still raising interest rates. Whether rates go up further this fall depends on what we see from inflation in the coming months.”

At about 3.9 percent, the 10-year Treasury note is now well below its 52-week high of 4.33 percent, which was hit in October 2022. The lower long-term yield even as the Fed continues to raise short-term rates suggests that investors are preparing for a recession in the near term as well as worrying about the financial system’s stability in light of recent bank failures .

Here are the winners and losers from the Fed’s latest decision.

1. Savings accounts and CDs

Higher interest rates mean that many banks are likely to raise yields on their savings and money market accounts , though the pace will vary from bank to bank. But rates may not have much further to rise.

“If the Fed is close to being done with rate hikes, there is limited room for further increases in savings account and CD yields,” says McBride. “The good news for savers is that you can finally earn more than inflation on cash investments and that is unlikely to change any time soon.”

Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions , where rates are typically much better than those offered by traditional banks.

When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.

With rates likely to be nearing a top, it may be a good time to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high.

“Now is a good time to lock in multi-year CDs as those maturities are most susceptible to a pullback once the Fed moves to the sidelines,” says McBride.

2. Mortgages

While the federal funds rate doesn’t really impact mortgage rates , which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling from its highest levels as the market prices in the potential for a recession, mortgage rates have gone along for the ride but remain elevated.

“Mortgage rates are still near 7 percent and we’ll need to see a meaningful and sustained decrease in inflation before mortgage rates move materially lower,” says McBride. “The record low number of homes available for sale has kept a floor under prices and even pushed them higher in some markets, all despite high mortgage rates.”

Mortgage rates remain well above where they were a year ago, and this – following the rapid rise in housing prices over the past couple of years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market.

The cost of a home equity line of credit (HELOC) should inch higher since HELOCs stay aligned with changes in the federal funds rate. HELOCs are typically linked to the prime rate , the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will see rates tick up, so it can be a good time to comparison-shop for the best rate .

3. Stock and bond investors

The stock market soared as long as the Fed kept rates at near-zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs.

Now with the 10-year Treasury moderating, investors have sent stocks higher in the last few months because they think they can see the end of rate hikes. Still, higher rates should slow growth and therefore corporate earnings, if not create an outright recession.

“The Fed is meeting and raising interest rates right smack in the middle of quarterly corporate earnings season,” says McBride. “Though the stock market has been on the rise lately, sentiment can change quickly and there is ample fuel for volatility if that happens. Bond yields are high enough to get investors’ attention, particularly if the stock market gets choppy.”

Higher rates hit bonds hard, and the longer the bond’s maturity, the more it’s been stung by rising rates. However, with a rate pause last month and investors now anticipating an end to the Fed’s aggressive tightening, the bond market has been finding a floor on prices. And those putting new money into bonds should be liking what they’re seeing.

When rates begin to fall again, bond investors will benefit as bond prices rally higher. But with the economy yet to endure a recession, stock investors may still be in for a choppy ride.

Short-term rates remain attractive if you’re looking for a safe place to stash money while waiting for things to cool off.

4. Borrowers

If you’re an existing borrower and don’t need to tap the market for money – say, you previously locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But with higher rates, everyone else who’s looking to access new credit is still squeezed, whether that’s credit cards (more later), student loans , personal loans , auto loans or whatever else you might need to borrow for.

The average interest rate on personal loans is 11.16 percent annual percentage rate (APR), as of July 19, according to a Bankrate analysis, so the rate hike will put upward pressure on rates there. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent APR, when the fed funds rate was near zero.

Besides these new borrowers, however, anyone with floating-rate debt will have to bear with higher rates. And you may have an older loan that’s resetting at this year’s higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment.

5. Credit cards

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will ratchet up quickly. Rates on cards are already at multi-decade highs and have risen as the Fed sharply raised rates.

“Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind,” says McBride.

Rates on credit cards are largely a non-issue if you’re not running a balance.

6. The U.S. federal government

With the national debt near $33 trillion , higher rates will put more upward pressure on the borrowing costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term.

As long as inflation remained higher than interest rates, the government was slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. Now, with interest rates higher than inflation, the tables have turned, and the government is repaying debt with today’s more costly dollars.

Bottom line

Inflation has been running hot over the last couple of years, and the Fed has stepped in again to raise rates and help move it lower. Smart consumers can take advantage, for example, by being more discriminating when it comes to shopping for rates on savings accounts or CDs. One option for those looking for some protection against inflation is the Series I bond , which offers a solid annual interest rate of 4.3 percent on bonds purchased through October 2023.

TRENDING

1. EMERGING MARKETS-Most Asian currencies gain after widely expected Fed hike

2. UPDATE 1-Netflix reworks Microsoft pact, lowers ad prices - WSJ

3. Hong Kong stocks rise on tech boost, HKMA raises base rate

4. INDIA BONDS-Indian bond yields ease as Fed's latest hike seen as last

5. Marketmind: Soft landing swings into view

Single Line Text

Bankrate. 264. James Royal. · 8 min read. The Federal Reserve announced that it’s raising interest rates by 0.25 percentage point , following its July 25-26 meeting, boosting the federal funds rate to a target range of 5.25 to 5.5 percent. With the move, the Federal Reserve has now raised rates a total of 11 times during this economic cycle in an effort to significantly reduce liquidity to the financial markets and tamp down high inflation. The Fed’s decision comes as inflation dropped to 3 percent year-over-year in June , after hitting the highest levels in decades at over 9 percent in mid-2022. Projections show an additional rate hike could be on the way before the end of the year if conditions warrant. At its last meeting, the central bank declined to raise rates, breaking a string of 10 straight meetings where it had hiked rates. “The Fed paused their interest rate hikes in June, but this month they’re back at it, raising interest rates for the eleventh time in the past 12 meetings,” says Greg McBride, CFA, Bankrate chief financial analyst. “Core inflation is stubbornly high and progress has been slow. The strength in the labor market and resilience of the overall economy are why the Fed is still raising interest rates. Whether rates go up further this fall depends on what we see from inflation in the coming months.” At about 3.9 percent, the 10-year Treasury note is now well below its 52-week high of 4.33 percent, which was hit in October 2022. The lower long-term yield even as the Fed continues to raise short-term rates suggests that investors are preparing for a recession in the near term as well as worrying about the financial system’s stability in light of recent bank failures . Here are the winners and losers from the Fed’s latest decision. 1. Savings accounts and CDs. Higher interest rates mean that many banks are likely to raise yields on their savings and money market accounts , though the pace will vary from bank to bank. But rates may not have much further to rise. “If the Fed is close to being done with rate hikes, there is limited room for further increases in savings account and CD yields,” says McBride. “The good news for savers is that you can finally earn more than inflation on cash investments and that is unlikely to change any time soon.” Savers looking to maximize their earnings from interest should consider turning to online banks or the top credit unions , where rates are typically much better than those offered by traditional banks. When it comes to CDs, account holders who recently locked in rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it. With rates likely to be nearing a top, it may be a good time to lock in longer maturities on CDs, especially those in the 2-year to 5-year timeframe while they remain relatively high. “Now is a good time to lock in multi-year CDs as those maturities are most susceptible to a pullback once the Fed moves to the sidelines,” says McBride. 2. Mortgages. While the federal funds rate doesn’t really impact mortgage rates , which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield falling from its highest levels as the market prices in the potential for a recession, mortgage rates have gone along for the ride but remain elevated. “Mortgage rates are still near 7 percent and we’ll need to see a meaningful and sustained decrease in inflation before mortgage rates move materially lower,” says McBride. “The record low number of homes available for sale has kept a floor under prices and even pushed them higher in some markets, all despite high mortgage rates.” Mortgage rates remain well above where they were a year ago, and this – following the rapid rise in housing prices over the past couple of years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market. The cost of a home equity line of credit (HELOC) should inch higher since HELOCs stay aligned with changes in the federal funds rate. HELOCs are typically linked to the prime rate , the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will see rates tick up, so it can be a good time to comparison-shop for the best rate . 3. Stock and bond investors. The stock market soared as long as the Fed kept rates at near-zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs. Now with the 10-year Treasury moderating, investors have sent stocks higher in the last few months because they think they can see the end of rate hikes. Still, higher rates should slow growth and therefore corporate earnings, if not create an outright recession. “The Fed is meeting and raising interest rates right smack in the middle of quarterly corporate earnings season,” says McBride. “Though the stock market has been on the rise lately, sentiment can change quickly and there is ample fuel for volatility if that happens. Bond yields are high enough to get investors’ attention, particularly if the stock market gets choppy.” Higher rates hit bonds hard, and the longer the bond’s maturity, the more it’s been stung by rising rates. However, with a rate pause last month and investors now anticipating an end to the Fed’s aggressive tightening, the bond market has been finding a floor on prices. And those putting new money into bonds should be liking what they’re seeing. When rates begin to fall again, bond investors will benefit as bond prices rally higher. But with the economy yet to endure a recession, stock investors may still be in for a choppy ride. Short-term rates remain attractive if you’re looking for a safe place to stash money while waiting for things to cool off. 4. Borrowers. If you’re an existing borrower and don’t need to tap the market for money – say, you previously locked in a 30-year fixed-rate mortgage in 2021 or 2022 – you’re in good shape. But with higher rates, everyone else who’s looking to access new credit is still squeezed, whether that’s credit cards (more later), student loans , personal loans , auto loans or whatever else you might need to borrow for. The average interest rate on personal loans is 11.16 percent annual percentage rate (APR), as of July 19, according to a Bankrate analysis, so the rate hike will put upward pressure on rates there. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent APR, when the fed funds rate was near zero. Besides these new borrowers, however, anyone with floating-rate debt will have to bear with higher rates. And you may have an older loan that’s resetting at this year’s higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment. 5. Credit cards. Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will ratchet up quickly. Rates on cards are already at multi-decade highs and have risen as the Fed sharply raised rates. “Prioritize repaying high-cost credit-card debt and utilize a zero percent or other low-rate balance-transfer offer to give those debt repayment efforts a tailwind,” says McBride. Rates on credit cards are largely a non-issue if you’re not running a balance. 6. The U.S. federal government. With the national debt near $33 trillion , higher rates will put more upward pressure on the borrowing costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term. As long as inflation remained higher than interest rates, the government was slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. Now, with interest rates higher than inflation, the tables have turned, and the government is repaying debt with today’s more costly dollars. Bottom line. Inflation has been running hot over the last couple of years, and the Fed has stepped in again to raise rates and help move it lower. Smart consumers can take advantage, for example, by being more discriminating when it comes to shopping for rates on savings accounts or CDs. One option for those looking for some protection against inflation is the Series I bond , which offers a solid annual interest rate of 4.3 percent on bonds purchased through October 2023. TRENDING. 1. EMERGING MARKETS-Most Asian currencies gain after widely expected Fed hike. 2. UPDATE 1-Netflix reworks Microsoft pact, lowers ad prices - WSJ. 3. Hong Kong stocks rise on tech boost, HKMA raises base rate. 4. INDIA BONDS-Indian bond yields ease as Fed's latest hike seen as last. 5. Marketmind: Soft landing swings into view.