Investors are still crying in their martinis because stock prices plunged after the Federal Reserve raised interest rates. As a result, the Dow Jones and S&P 500 indexes are only a smidgen higher than they were at the beginning of the year.
And the wailing on Wall Street goes on. Why? Analysts think the Fed may boost rates a couple of more times this year to head off inflation, and that could further clobber stocks.
Where does that leave the little guy, Joe G. Doaks, who may or may not own any stocks or mutual funds?
If Doaks elects to follow–much less believe–every piece of economic gibberish now coming out of experts’ mouths, he’s going to be one confused cookie. Employment figures. Wages. Prices. Housing sales. “Never mind all those theories,” he’s saying to himself. “How will all that affect my wallet?”
Here’s a crash course on what’s happened so far, and what may happen:
They say it takes six months for a Fed rate hike to feel its way into the economy, so the impact has been minimal to date on savings and loans. Yet, whenever the Fed raises a rate, the headlines read like a horror show that causes people to freak out.
Actually, since the one-quarter-percent increase on March 25:
– Some savings rates have gone up more than borrowing rates. The annual interest earnings on a typical 2 1/2-year, $10,000 CD have risen by $120, while those on an average six-month CD have climbed by $50. That doesn’t usually happen. Banks historically have increased their loan rates faster than CD yields following a Fed move.
– In contrast, fixed-rate credit cards have remained at 17.03 percent–still disgustingly high–but variable-rate card issuers will make it up by jacking up their rates a quarter-percent to match the Fed increase. That will up the average variable-rate card to 16.48 percent for April billing statements, or $494.40 in annual interest on a $3,000 balance. That works out to only $7.50 a year more than with the old rate.
– The average new car loan of, say, $16,000 over four years today costs only $1 more per month to finance than it did one month ago.
– Ironically, the introductory rate on a typical home equity line of credit has dipped from 8.45 percent to 8.43. How come? Stiff competition among banks during tax season, when the deductible-interest feature on these loans is uppermost in peoples’ minds.
– Mortgage rates have felt the Fed’s move the most. Although these types of loans are not directly tied to Federal Reserve rates, as many reports would have you believe, they’re nevertheless influenced by a generally rising rate environment. That’s the case now. Since March 25, the average monthly payment on a 30-year, fixed-rate home loan has risen by a scant $9, but the total interest cost has climbed by $3,335 over the life of the loan.
But suppose the Federal Reserve raises rates at least two more times, as it’s expected to do. Then what happens to Joe Doaks’ pocketbook?
Let’s assume the next two Fed hikes are a quarter-point each time, or a total of one-half percent between now and the end of the year. Banks will boost their prime rate immediately, by the same margin.
Then, the typical scenario is that within six to eight weeks following each quarter-point rise, the banks’ personal loan rates, such as those on cars and home equity, rise by about 15- to 20-hundredths of a percentage point. In other words, if the prime rate goes from 8.50 percent to 8.75, the average new car loan rate might go from 9.38 percent to 9.58 or thereabouts.
CD rates won’t usually trend upward as much. On a one-year CD, for instance, they’d usually gain by about 15-hundredths of a percent in the six-to-eight-week time frame. A CD yielding 5.18 percent (the current average) would increase to maybe 5.33 percent or so.
If banks anticipate that interest rates will crawl much higher, they often raise their long-term CD yields, such as those on five-year accounts, faster than yields on six-month accounts. You’re seeing that happen since the recent Fed increase.
If all that were to happen–there’s no guarantee it will–you could see the average one-year CD yield perhaps rise to 5.50 percent, and the five-year rise above 6 percent before year’s end. New car loans might go to 9.75 percent, home equity lines to 8.7 percent, and mortgages–the most fickle and unpredictable of all rates–to 8.6 percent.
Those are just another guy’s guesses, of course, but remember two things: Go short with your CD investments while rates are rising, and don’t buy every scare story that comes down the pike when the Fed raises a rate.
– Latest rate trend. Mortgage rates slipped slightly in the week, with the 30-year fixed rate now at 8.07 percent.
– Credit card tip. Interest on cards secured by your home may be tax deductible. But you could lose your home if you don’t pay.
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Robert Heady publishes Bank Rate Monitor, a newsletter based in North Palm Beach, Fla.
