The Federal Reserve began hiking the rates earlier this year to thwart inflation. The raises began with a .25 percentage point bump in March.
The hikes are altering the cost of money around the world as other central banks have raised rates to try and stem the dollar’s competitiveness and curb high inflation. It also likely won’t be the last time borrowers see a price hike, either.
It’s bad news for borrowers of all kinds, but Americans with credit card debt might begin to see interest rates impede their payments.
Credit Cards Will Cost More
The rate hike impacts borrowers across the board for any purchase that requires a loan. Mortgage rates have leapt to more than 7 percent, and credit card annual percentage rates will jump, too. Credit card APRs trend on the higher side anyway, and as rates increase, borrowers could see their credit card debt increasing at a faster pace because of the higher interest rates.
Americans have an average of about $6,000 in credit card debt, according to personal finance service Credit Karma, although the amount varies widely across generations and throughout different states. It would take more than 18 years to pay off $6,000 in credit card debt by making $80 monthly payments with a 15 percent APR. The debt would wrack up more than $11,000 in interest over the same time period.
The last time Federal Reserve rates were at 4 percent was January 2008, during the financial crisis.
Rate Rises Not Done
The Federal Reserve Open Market Committee made clear that the markets should expect further rate rises, noting “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”
The committee also noted that “the pace of future increases” would take into account the “cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
“We still have some ways to go…the ultimate level [of the target rate] may be higher than previously anticipated,” Federal Reserve Chair Jerome Powell said during the rate announcement on Wednesday.
Powell added that the key was to get inflation back to 2 percent and that the increases were appropriate for that goal.
“We will stay the course until the job is done,” he said. “We have some ground left to cover here. And cover it we will.”
The consecutive rate increases have led to the fastest pace for rate hikes in decades, according to Kathy Jones, a chief fixed income strategist at Charles Schwab.
Jones shared a graphic of rate rises over the years on Twitter.
Paul Ashworth, chief North America economist at Capital Economics, said rate hikes were now “well into the restrictive territory” after the Fed’s announcement.
However, Ashworth said the Fed was setting itself up to reduce the amount it increases rates by, likely beginning at the end of this year. Ashworth predicted the Federal Reserve to raise rates by 50 basis points, or .5 percentage points, in December, followed by a smaller .25 percentage point hike in January.
In the meantime, Americans will continue seeing higher rates while trying to pay off debt.
