Last week, the Federal Reserve increased interest rates by three-quarters of a percentage point. This is an effort to fight rampant inflation.
Inflation has been building due to increasing prices for fuel and other commodities, due to the war between Ukraine and Russia, and the pumping of cash into the market during the pandemic. Raising interest rates makes it more difficult to borrow money, eventually leading the economy to slow down.
The Federal Reserve interest rate is the core rate which affects all other interest rates, including rates on housing loans, credit cards, and car loans. And when rates are increased, it greatly impacts the economy.
A recent article from Nerd Wallet discusses what this will mean for consumers. Most consumers who have a mortgage have interest rates locked at a fixed-rate, and this latest change doesn’t affect them. However, credit cards are different. For people with credit card debt, the interest rates on their credit cards increase as well. While this doesn’t harm those that pay off their bills on time, for those with outstanding debt, it could be crippling. We discuss how the consumer budget is under stress in this recent Mercator report.
According to Brian Riley, Director of Credit at Mercator Advisory Group, the rate increases on credit cards will not alone create a consumer budget issue. “Instead, it is the entire consumer budget under stress,” he said. “Inflation drove gasoline, grocery, and housing prices to new levels. Interest is increasing for mortgages, personal loans, and consumer credit.”