On March 7th, 2023, Fed Chair Jerome Powell signaled that the Federal Reserve will once again increase interest rates after the March-22 meeting of the Board of Governors of the Federal Reserve. The goal remains the same: to tame inflation. Jerome Powell wants to bring inflation to the 2% margin. Although this is unlikely to happen realistically, the patron of the central bank of the United States is convinced that it is doable. Based on Powell’s testimony, it is expected this time to see interest rates increase on a 0.50-basis point. Prior to that announcement, interest rates were hiked on a 0.25-basis point. The incremental process of interest rate hikes increases saving rates and the cost of borrowing. This new hike is going to affect ordinary Americans dramatically in several aspects.
Source: Google Finance
First, this new perspective hike in interest rates will affect mortgage rates and mortgage applications. The higher one’s mortgage interest rates, the more that person can expect to pay in mortgage-related fees each month. Current mortgage interest rates, which are impacted by the federal funds rate and other market rates, influence the price of housing. Right now, 30-year fixed mortgage rates are set at 7.393%, 15-year fixed mortgage rates are set at 6.429%, and ARM (Adjustable-rate mortgage) is set at 7.898%. If the Federal Reserve increases federal fund rates by 0.50 points, that means that the 30-year fixed rate will be 7.893% the 15-year fixed rate will be 6.929% and ARM rates will be 8.398%. This means that, for example, if a family decided to purchase a $250,000 home in Cook County, and made a $50,000 down payment for a 30-year fixed rate at 7.893%, then the monthly mortgage payment would cost $1,683. If interest rates were very low, let’s say 3%, then that same monthly mortgage payment would only cost $1,074. This is a $600 increase strictly based on interest rates. Therefore, interest rates will increase the cost of mortgages but there is no guarantee that wages will increase as well to match the cost of living.
Source: The Consumer Credit Card Market Report
Second, this new hike in interest rates will affect credit payments. Ordinary Americans live on credit payments. Credit card payments and car loan payments are the two major monthly expenses that ordinary Americans face besides housing payments (mortgage or rent). Credit card rates are tied to the prime rate, to which issuers add a markup to arrive at one’s card’s interest rate. The prime rate, in turn, is based on the Fed’s target interest rate. This means that when the Fed starts hiking its target rate the prime rate will also go up. The average credit card interest rate is currently at 24.10%. In November 2022, the average credit card interest in the United States on accounts with balances that assessed interest was 20.40%, according to the Federal Reserve. The forthcoming hikes will make credit card payments costlier, especially for subprime consumers.
Third, this forthcoming hike in interest is going to affect the retail investors who invest in the stock market, especially tech stocks. Tech stocks generally underperform when interest rates are hiked. First, tech companies are growth companies. Hence, to fuel growth, they rely on borrowing money, regardless of whether companies use this money to hire software engineers, produce must-see streaming shows, or make smartphones. Thus, when interest rates are low, it is much cheaper to borrow more money for more initiatives and growth. High-interest rates slow the expansion of growth companies. “Higher rates stop America’s innovation engine because they’ll continue to hinder venture capital and private equity and credit investments,” according to Paul Meek, portfolio manager at Independent Solutions Wealth Management. We can then expect the Nasdaq to take a toll once these interest rates are hiked. Most investors will be forced to hold cash and wait that stocks, especially growth stocks, to get back to their prime value. For value investors, this is an opportunity to buy shares at a discounted rate since these interest rates will not only affect tech stocks but the stock market in general.