On Wednesday, the Federal Reserve announced a quarter-percentage-point interest rate increase.
The move comes almost two years to the day since the central bank cut its federal funds rate to zero to cushion the impact of the COVID-19 pandemic on the U.S. economy.
“It’s clearly time to raise interest rates,” said Fed Chairman Jerome Powell at a press conference.
The Federal Reserve made the decision following a two-day meeting at the central bank where the Fed indicated it would raise the federal funds rate to a range of 0.25- 0.50 percent.
The CME FedWatch Tool projects an approximate 35% chance that the benchmark rate will be between 1.75 to 2 percent by the end of the year.
Experts say it could still profoundly affect consumer spending, impacting 70% of the American economy. Credit card borrowers, homebuyers, and small-business owners should be prepared for a season of cheap money to come to an end.
Ted Rossman, a senior credit card analyst for Bankrate.com, said credit cardholders would be the first to notice the effects of tighter monetary policy. “Rate hikes are passed through on existing debt pretty much right away, within a month or two,” he said.
Despite the Fed keeping interest rates near zero for the past two years, the current average credit card annual percentage rate (APR) is already about 16%, just below its April 2019 record high of about 18%.
“They’ve been padding margins in recent years,” Rossman said about APR.
Rossman predicted that the Fed’s path to rate normalization would increase those APRs.
“We could well be at a new record by the end of the year. Market participants seem to be pricing in perhaps seven quarter-percentage-point hikes,” he said. “So if that happens, that could take the average credit card rate to [more than] 18 percent.”
A chief economist at CUNA Mutual Group, Steve Rick, warned that mortgage borrowers would also feel the squeeze. “Higher mortgage rates will make home-buying even more difficult than it already is in the current housing boom. It will keep more Americans from accumulating wealth through real estate,” he said.
Higher interest rates also impacts small-business owners.
Rossman said in his report that consumers and small-business owners should pay down high-interest debt before rates start climbing in earnest.