US credit-card rates have soared past 20%, mortgage costs have climbed to the highest since 2008 and companies are having a harder time borrowing money.
The Federal Reserve’s aggressive rate-hiking cycle to tame decades-high inflation is expected to take months to fully filter through the economy. But the impact has been immediate for the millions of people who need a loan today to pay bills, go to college, buy a home or expand their business.
That’s because the federal-funds rate, which the central bank raised by the most since 1994 this week, is a benchmark for debt that affects consumers and companies big and small in everyday life.
This week’s spike in mortgage rates -- the biggest since 1987 -- has all but ended plans for people like Dana Bougon who were hoping to buy a house. Rates for a 30-year loan have increased to 5.78%, almost doubling in a year.
“We’re hoping to retire soon and move to North Carolina -- but we can’t now with mortgage rates so high,” said Bougon, 58, who lives with her husband outside of New Orleans. “It’s a huge jump when you go from a 3% rate to almost 6%, and I think it’s going to go a lot higher. It will make it out of reach for us.”
As economists debate if or when the Fed’s all-out battle against inflation will cause a recession, financial hardship is already a reality for consumers facing rising food and gas prices. Higher interest rates will make it more expensive for companies to invest, and could mean job cuts down the road -- although the unemployment rate remains historically low and layoffs have been mostly limited to industries like housing, crypto and technology.
“If the Fed accomplishes what it’s advertised, that’s going to be different than what most people have experienced in their lifetimes,” said Mark Hamrick, senior economic analyst at Bankrate, a consumer financial services company.
Credit Cards
With inflation taking a bigger bite out of household budgets, consumers have loaded up on credit cards. Issuers typically use the Fed-influenced prime rate as a base to charge interest plus an additional spread. So Fed hikes cause an immediate spike.
“As we see balances continue to rise and interest rates rise and the price of everything continues to rise, it is possible that more people are going to be unable to pay their bills,” said Sara Rathner, a credit-card expert at personal-finance company NerdWallet. “It’s not going to be across the board, but there’s a higher chance of that happening.”
For Annie Brucato, a 67-year-old retiree in Milltown, New Jersey, it’s already a reality. Bills are racking up -- everything from electricity to cable. She’s trying to get a personal loan as well as a summer job with flexible hours to help make ends meet. Her one credit card has accumulated roughly $6,000 in debt.
“It just keeps piling up no matter how much I pay,” Brucato said. “I feel like every time I turn around, I’m being nickel-and-dimed to death.”