The Federal Reserve signaled during its two-day meeting last week that interest rates will remain elevated for some time, bringing to an end the era of ultra-cheap money.
Americans will be forced to adapt to a new normal where savers benefit from higher rates, but borrowers face steeper debt payments on everything from credit cards to mortgages to student loans.
"Whether the Fed does or doesn’t raise rates further in the coming months, the high rates are here to stay for awhile," said Greg McBride, chief financial analyst at Bankrate.
Policymakers voted during their policy-setting meeting to leave interest rates unchanged at a range of 5.25% to 5.5%, the highest level since 2001. But officials also opened the door to another quarter-point increase before the end of the year – and indicated they will hold rates at those elevated levels for an extended period of time.
INTEREST RATES ARE HIGH. HERE HOW YOU CAN TAKE ADVANTAGE OF THEM
New economic projections laid out after the meeting indicate the U.S. central bank will not cut interest rates until 2024, to a rate of about 5.1%. Officials projected they will eventually lower rates to 2.9% by 2026, and hold them at 2.5% in the longer run.
"The forward guidance from the FOMC’s policy statement and its updated macro and interest rate forecasts indicates an ongoing hawkish policy stance and a higher-for-longer rate path," said Kathy Bostjancic, Nationwide chief economist. "The reason is that inflation remains elevated and should continue to retreat only gradually."
For Americans who carry a balance from one month to the next, the steady increase in rates over the past 18 months could be costing them hundreds – even thousands – of dollars.
HOW HIGH INTEREST RATES ARE ALREADY HITTING AMERICANS
While the federal funds rate is not what consumers pay directly, it affects borrowing costs for home equity lines of credit, auto loans and credit cards. Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
In fact, housing affordability is worse today than during the peak of the 2008 housing bubble thanks to the astronomical rise in mortgage rates over the past year.
The Atlanta Fed's Housing Affordability Monitor, which compares median home prices and other housing costs with median household income, indicates the median U.S. household would have to spend about 43.2% of their income to afford the median-priced house as of June, according to the index. That is the highest share in data dating back to 2006.
Americans with credit card debt are also feeling the pinch from higher rates.
Average interest rates on credit cards have already surged from 16% in February 2022, before the Fed began hiking rates, to a new record of 20.71% as of Wednesday, according to a Bankrate database that goes back to 1985. The previous record was 19% in July 1991.
Even just a minor change in credit card rates can affect how much Americans owe. For instance, if you owe $5,000 – which the average American does – current APR levels would mean it would take about 277 months and $7,723 in interest to pay off the debt making the minimum payments. By comparison, that same amount of debt would have taken 269 months and $6,126 to pay off when interest rates were lower.
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Those rates are unlikely to fall substantially anytime soon, thanks to the Fed's higher-for-longer policy stance.
"The era of cheaper debt is gone," said Karl Jacob, the CEO and founder of LoanSnap. "Interest rates will remain at higher levels, causing many Americans to be saddled with higher interest debt, impacting their financial health and the health of the broader economy."
