2 in 3 Americans think inflation is going to be worse in 2023There is a 99% chance of the Federal Reserve raising its target rate by 25 basis points on February 1, so the personal-finance website WalletHub today released the results of a new Fed Rate Hike Survey gauging consumer sentiment on the matter. Access the survey result here.
Federal Reserve rate hikes can send shockwaves through stock markets and put many people to sleep. But just because the nitty-gritty of the country’s fiscal policy isn’t exciting to most does not mean we’re unaffected. For example, consumers will pay around $30.4 billion in extra interest charges over the next 12 months due to the Fed’s 450 basis points in rate hikes between March 2022 and February 2023. In addition, if the Fed raises its target rate by 50 basis points on March 22 (70% probability), it will cost consumers another $3.4 billion over the next 12 months. All signs point to the Federal Reserve increasing its target rate by 50 basis points in March 2023.
Fed Rate Hike Impact by Loan Type
Interest rates on financial products, from credit cards to car loans and mortgages, are generally based on some sort of benchmark rate, which in turn is influenced by the Federal Reserve’s target interest rate in one way or another. So when the Fed’s target rises, the interest rates consumers pay also go up, increasing the cost of borrowing. Unfortunately, the rates we earn on deposit accounts aren’t nearly as quick to react.
Below, you can see how Fed interest rate increases have impacted consumers’ finances in the past, as well as how much we can expect a February 2023 rate hike to cost us.
The vast majority of credit card rates are variable, tied to the Prime Rate. As a result, we expect to see credit card rates rise the same amount as the Fed’s target.
- A 50-basis point increase (70% probability) will cost credit card users at least $3.4 billion over the next 12 months. A 25-basis point increase (30% probability) would cost credit card users at least $1.7 billion over the next 12 months.
- Due to the 450 basis points in rate hikes between March 2022 and February 2023, credit card users will wind up with $30.4 billion more in interest charges over the next 12 months than they would have otherwise.
We don’t expect much of a change in mortgage rates following a March rate hike, as the mortgage markets have already accounted for the move. That’s because mortgages have fixed rates that are priced with a far longer time frame in mind than other borrowing vehicles.
WalletHub’s analysts estimate that the upcoming February rate hike has increased the cost of new mortgages by around 21 basis points, which translates to roughly $21,600 over the life of a 30-year loan, assuming the average home loan of $431,900.
- WalletHub expects the average APR on a 48-month new car loan to rise by around 24 basis points in the months following the Fed’s next 50 basis point rate hike.
- For historical context, the average APR on a 48-month new car loan rose from 4.00% in November 2015 to 5.50% in February 2019. That’s a 150-basis point increase in a period characterized by 225 basis points in Fed rate hikes.
- WalletHub expects little, if any, change in the APYs available from most deposit accounts following the Fed’s next rate hike. Online savings accounts are the exception, as WalletHub projects a 26-basis point increase in the average APY following the Fed’s March rate hike.
- Online savings account yields increased by an average of 235 basis points from January 2022 to March 2023, despite 450 basis points in Fed hikes during that period. Banks seem quick to pass higher rates to consumers on loans but are not sharing the love on the deposit front.
Q&A with WalletHub analyst Jill Gonzalez
Are consumers worried about inflation?
“Concern about inflation has been growing among consumers for months, despite recent indications that prices are starting to stabilize. A new WalletHub survey found that 87% of Americans are concerned about inflation right now, and nearly 9 in 10 people believe inflation will impact their spending in 2023. Two-thirds of people even think inflation will actually be worse in 2023 than it was in 2022,” said Jill Gonzalez, WalletHub analyst. “Until consumers see a meaningful drop in their utility bills and the prices at the supermarket, we can expect inflation anxiety to persist.”
Are Americans prepared for a recession?
“Most Americans are prepared for a recession in the sense that they know one is coming. According to a new WalletHub survey, 70% of Americans believe a recession is inevitable. On the other hand, only 45% of people say they are prepared to deal with the effects of a recession,” said Jill Gonzalez, WalletHub analyst. “The most important things to do if you feel unprepared for a financial downturn are to begin paying down debt and stashing away cash with newfound intensity. This will put you in a more stable position.”
How do Fed rate hikes affect credit cards?
“Federal Reserve rate hikes have contributed to record-high credit card interest rates. The Fed increased interest rates by 425 basis points in 2022, which means consumers will pay around $27.2 billion in extra interest charges in 2023 alone, and this is not even counting hikes that actually happen in 2023,” said Jill Gonzalez, WalletHub analyst. “We expect the Fed’s February 1 rate hike to cost people with credit card debt approximately $1.6 billion over the next 12 months. When you collectively owe more than $1.1 trillion in credit card debt, even a quarter-point rate hike can add up to big money.”
After February, will there be any more rate hikes in 2023?
“Market tea leaves currently point to one more rate hike in March, then a pause for several months, followed by the potential for a couple rate cuts toward the end of the year,” said Jill Gonzalez, WalletHub analyst. “A lot depends on how the economy responds to the Fed’s recent moves as 2023 unfolds.”