The Cost of Battling Inflation: $691 a Month for Borrowers

Interest rates have gone up yet again, putting more pressure on borrowers who are already paying nearly $700 a month more for typical loans than when the Fed’s anti-inflation battle began.

The Federal Reserve raised its benchmark interest rate by a quarter-point Wednesday, bringing it to a range of 5.25% to 5.5%, its highest since early 2001. The Fed is following its traditional anti-inflation playbook, pushing the idea that higher interest rates will lead to less spending. That lower spending level is supposed to restore the balance between supply and demand for the things people buy and hopefully curb the rapid price increases of the past two years. 

As of June, year-over-year consumer price increases had cooled to 3% as measured by the Consumer Price Index, down from their peak of 9.1% in June 2022. However, borrowers are paying a steep price for this anti-inflation progress.

Fed Rate Hikes Have Added Nearly $700 to Monthly Payments

Rate hikes are meant to discourage spending by raising borrowing costs, and they have done just that. Nearly a year and a half of hikes have driven up interest rates on consumer loans influenced by the key Fed funds rate, including credit cards, car loans, and mortgages. 

Consider an imaginary couple in the market for a house and a new car. Assume the couple has the average amount of credit card debt. Their monthly payments are $691 more now than they would have been before the Fed began ratcheting up rates.

The Fed’s rate hike campaign has added $218,574 in interest to the lifetime costs of those potential home and car loans. Here’s how that works out:

By the Numbers

Let’s say our imaginary couple bought a home for the median national price of $410,200 today. If the couple made a 20% down payment and got the average rate on a 30-year fixed-rate mortgage (6.78% according to Freddie Mac), they’d have to pay $2,135 a month and $440,436 in interest over the life of the loan. Before the Fed started hiking interest rates, the average rate was 3.85%, so they’d only have paid $1,538 a month and $225,679 in interest over the life of their loan on the same-priced house.

The story is similar for car loans. According to Experian, the average new car would require our couple to borrow  $41,445. The Federal Reserve found the average interest rate on a five-year auto loan has risen to 7.81% from 4.52% pre-rate-hike. That means their car payment for a 60-month loan taken out today would be $837 versus $773 in early 2022.

Likewise, they’d have to pay $101 in interest a month on their $5,910 credit card debt, the average according to Experian. That’s up from $71 before the rate hike campaign began, according to data from the Federal Reserve that showed the average credit card interest rate rose to 20.68% in May from 14.56% in February 2022. 

Homebuyers Feel the Most Pain

The higher interest rates have been especially tough on first-time homebuyers. High interest rates make it harder to build equity, upending the traditional strategy of younger homebuyers to buy a small “starter home” and build equity before trading up to a larger one.

“The Fed's anti-inflation rate hiking campaign has doomed millennials and younger generations to lose money on starter homes,” said Eric Amzalag, a financial planner in Woodland Hills, California. “The conversation I'm having with millennials and younger homebuyers is to wait longer to buy your dream house because you'll lose money buying that starter house and end up unhappy. It will set you back years.”

In 2022, only 26% of people who bought houses were doing so for the first time, down from 34% in 2021, according to a recent report from the National Association of Realtors. The average age of first-time buyers rose to 36 from 33, underscoring the challenges for younger buyers in the era of high interest rates. 

Savers Rejoice

The rate hikes have had an upside: Higher interest rates mean better deals for savers. The Fed’s hiking frenzy has driven up rates that banks offer for certificates of deposit, high-yield savings accounts, and other instruments with guaranteed returns. Savers can now get a one-year CD with an APY as high as 5.75%, versus just 1% in February 2022, according to data collected by Investopedia.

Given that the typical family who owned certificates of deposit as of 2019 had $25,000 in CDs, according to the Federal Reserve, putting that in a one-year CD could earn $1,438 in interest today, a major upgrade from the $250 it would have earned in 2022.