Prices Are Up and Now Rates Are Too. Who Pays for the Cure?
Twelve people voted, without a single dissent, to make borrowing cost more for the rest of us. The Federal Reserve raised its benchmark interest rate by a quarter point, to a range of 3.75 to 4 percent, which recorded the vote as 12 to 0. It was the first increase since the summer of 2023, according to the Associated Press.
The reason fits in one word: prices. Consumer prices rose 3.4 percent in August from a year earlier, according to Labor Department figures reported by the AP. The Fed aims for 2 percent, and the AP notes inflation has run above that mark for more than five years. The Fed’s statement says simply that inflation remains elevated.
That leaves us in an odd spot. Groceries, gas and rent already cost more, and now the main tool for fighting those prices makes our debts cost more too. We get squeezed from both sides while we wait for the medicine to work.
Credit cards move first, because most card rates follow the Fed. Matt Schulz of LendingTree told CNBC that cardholders should expect their rate to climb a quarter point within a couple of months. For one household, he said, that is a dollar or two a month. Added together, it comes to roughly $2 billion in extra interest over the next 12 months, according to a WalletHub analysis.
Cars were already a stretch. The average new car cost $50,089 last month, according to Kelley Blue Book. The average loan rate was 7 percent for a new car and 10.6 percent for a used one, according to Edmunds. The average monthly payment reached $765 in the second quarter, according to Experian.
Mortgages are a slower story, since fixed home loans follow the bond market more than the Fed. Still, they were climbing before anyone voted. The typical fixed mortgage running 30 years averaged 6.76 percent in the week ending Sept. 10, up from 6.35 percent a year earlier, according to Freddie Mac. Nearly half of existing mortgages carry rates of 4 percent or lower, according to the National Association of Realtors as reported by the AP. Those of us holding such loans are protected and also stuck, because moving means swapping a cheap loan for a costly one. Those of us still renting and saving for a first home have no such protection. When we finally buy, we borrow at today’s rates.
Not everyone loses. Savers should earn a bit more. Wealthier and generally older households will handle higher rates better, since they borrow less and save more. That puts the weight on younger families, renters and anyone carrying a balance.
The Fed has an answer. Chair Kevin Warsh told reporters the Fed cannot control any single price, naming oil and groceries, but it can keep those increases from spreading through the whole economy. In plain terms, officials believe we can absorb this.
They also expect to ask more of us. The median Fed official sees the benchmark rate near 4.1 percent by the end of this year, which implies one more increase, according to the Fed’s economic projections. Those same projections put inflation at 3.7 percent this year, 2.3 percent next year, and back to 2 percent only in 2029. The ripple does not stop at our borders either, since countries and companies abroad that borrow in dollars tend to pay more when our rates rise.
We vote in less than seven weeks. Every candidate will say the word affordability. The better question for them is who should carry the cost of getting there, and for how long. Go beyond the headlines…
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