The Federal Reserve announced that it’s raising interest rates 0.75 percentage points, following its July 26-27 meeting, bumping the federal funds rate to a target range of 2.25 to 2.50 percent. The move follows an increase of 75 basis points in June, as the Fed rapidly reduces liquidity to the financial markets to help tamp down soaring inflation.
The Fed’s decision comes as inflation rages in the U.S. economy at the highest annual rate in some 40 years, reaching 9.1 percent in June. With the Fed hitting the brakes on an overheated economy, the main question for many market watchers is how fast Fed Chair Jerome Powell will continue to raise rates and whether that spills over into a recession.
“Inflation has set a fresh four-decade high, compelling the Federal Reserve to keep hiking rates in an aggressive fashion,” says Greg McBride, CFA, Bankrate chief financial analyst. “This latest rate hike is evidence that the second half of 2022 will see the Fed even more active than they were in the first half of the year.”
At about 2.8 percent, the 10-year Treasury bond is now at its highest level since late 2018. After some ups and downs in 2021, the benchmark bond has soared since December 2021 and especially since the start of March, when it sat at just 1.65 percent.
As the Fed continues to pursue what appears to be a longer period of raising rates, here are the winners and losers from its latest decision.
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 zooming higher in recent months, as the market prices in the Fed aggressively raising the fed funds rate, mortgage rates have risen alongside them.
The run-up in rates – following the rapid rise in housing prices over the past couple 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.
“Long-term interest rates such as the 10-year Treasury yield and fixed mortgage rates, have become more responsive to recession odds than inflation data,” says McBride. “In this paradigm, rate hikes actually lead to lower – rather than higher – mortgage rates because every time the Fed hikes rates it increases the odds of recession and the lower rates it eventually ushers in. But that is all assuming inflation eventually recedes, which it has yet to show any evidence of doing.”
So for now the result for would-be homebuyers is somewhat mixed by the rise in the fed funds rate. Here’s how to find the lowest mortgage rates today.
2. Home equity
The cost of a home equity line of credit (HELOC) will be ratcheting higher, since HELOCs adjust relatively quickly to 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, though interest expenses may continue to be low historically. As rates rise, it can be a good time to comparison-shop for the best rate.
With rates moving higher and the expectation that they’ll move higher still as the year progresses, those with outstanding HELOC balances should expect to see their payments continue to rise in the near term. (Here are the pros and cons of a HELOC.)
3. Savings accounts and CDs
Rising interest rates mean that banks will offer rising returns on their savings and money market accounts, but the speed with which they do this will vary from bank to bank.
“The outlook is improving for savers as the active Fed is leading to continually rising yields on savings accounts and CDs, particularly at the most competitive online banks,” says McBride. “Rising rates are a start, but savers really need inflation to come down in a meaningful way for those higher returns to shine.”
Account holders who recently locked in CD rates will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it.
Those with savings accounts may look forward to rising rates, but it’s off a low base, as most banks quickly ratcheted rates to near zero following the Fed’s emergency cuts in March 2020.
Savers looking to maximize their earnings from interest should turn to online banks or the top credit unions, where rates are typically much better than those offered by traditional banks.
4. Stock and cryptocurrency 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. But that’s changed.
Since late 2021, investors have been pricing in rate increases, and the S&P 500 has spent 2022 in a deep slump. And now with rates rising, investors are wondering how much higher they can go and how much lower stocks can fall.
“The combination of quarterly earnings announcements, high inflation, and the active Federal Reserve is a cocktail sure to deliver a belt of volatility to the stock market,” says McBride. “Investors are advised to maintain a long-term perspective and a disciplined habit of regular contributions, such as through a 401(k) plan or monthly dollar-cost-averaging.”
Cryptocurrencies have also been feeling the brunt since November, when the Fed more clearly telegraphed its intentions to reduce liquidity in the financial system. Bitcoin, Ethereum and other major cryptos have shown a solid downtrend for months and then crashed, as they priced in reduced stimulus and higher interest rates.
The Fed’s ongoing reduction in its own bond portfolio should further decrease support for stocks and crypto.
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 move higher now.
“Credit card rates will march higher in step with the Federal Reserve, and often follow within one or two statement cycles,” says McBride. “Pay down credit card debt now because it will only get more expensive and you don’t want that debt hanging over your head, should the economy topple into recession.”
If you have an outstanding balance on your cards, then you’re going to get hit with higher costs. With rates projected to rise for a while, it could also be a welcome opportunity to shop for a new credit card with a more competitive rate.
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 approaching $31 trillion, rising rates will raise the 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.
For now, the interest rates on debt remain at historically attractive levels, with 10-year and 30-year Treasurys running well below inflation. As long as inflation remains higher than interest rates, the government is 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.
Inflation has been running hot over the last year or more, and the Fed is raising interest rates to combat it. So plan carefully for how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs. One option for those looking for some protection against inflation is the Series I bond, which now offers a stunning interest rate of 9.62 percent.