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While the federal funds rate doesn’t really impact mortgage rates, which depend largely on the 10-year Treasury yield, they’re often moving the same way for similar reasons. With the 10-year Treasury yield zooming higher in recent months, as the market prices in the Fed aggressively raising the fed funds rate, mortgage rates have sharply risen alongside them. The run-up in rates – following the rapid rise in housing prices over the past couple of years – has created a double whammy for potential homebuyers. Home prices are more expensive and the financing is pricier, resulting in a slowdown in the housing market. “Mortgage rates have increased at the fastest pace on record, hitting 20-year highs,” says McBride. “The housing market that had been red-hot earlier this year has gone cold as higher rates price out would-be homebuyers. The increase in mortgage rates since the beginning of the year has the same impact on affordability as a 35 percent increase in home prices.” So for now, rising rates are making homes less affordable – and quickly. The cost of a home equity line of credit (HELOC) will also be ratcheting higher since HELOCs adjust relatively quickly to changes in the federal funds rate. HELOCs are typically linked to the , the interest rate that banks charge their best customers. Those with outstanding balances on their HELOC will see rates tick up. As rates rise, it can be a good time to . 2 Savings accounts and CDs
Rising interest rates mean that banks will offer rising returns on their savings and , but the speed with which they do this will vary from bank to bank. “If you’re seeking the top-yielding, nationally-available offers on savings accounts, money markets and CDs, you are seeing returns that you haven’t seen since late 2008 – and they’re poised to rise further,” says McBride. should consider turning to online banks or the , where rates are typically much better than those offered by traditional banks. When it comes to CDs, account holders who recently will retain those yields for the term of the CD, unless they’re willing to pay a penalty to break it. “For these better yields to truly shine, we need inflation to come down in a meaningful way. Earning 3.5 to 4 percent is a lot better when inflation is 2.5 percent than it is now at over 8 percent,” says McBride. 3 Stock and bond investors
The stock market soared as long as the Fed kept rates at near zero for an extended period of time. Low rates were beneficial for stocks, making them look like a more attractive investment in comparison to rates on bonds and fixed-income investments such as CDs. But that’s changed. Since late 2021, investors have been pricing in rate increases, and the has spent 2022 in a deep slump. And now with rates rising even further, investors are wondering how much higher they might go and how much lower stocks could fall as a result. “The stock market has again rallied around this notion that the Fed is about to pivot to a softer stance on interest rates,” says McBride. “Don’t bet on it.” “The pace of interest rate hikes may slow beginning in December but the eventual stopping point keeps getting reset higher and the amount of time rates will need to stay at that level is looking longer and longer,” according to McBride. “Higher rates for a longer period of time won’t be good news for corporate earnings and stock prices will eventually reflect that.” Higher rates have hit bond prices, too, pushing their prices down. The longer the bond’s maturity, the more it’s been hit by rising rates. Short-term bonds for good borrowers have gotten off mostly unscathed by the carnage in the bond market. Now short-term rates are much more attractive if you’re looking for while waiting for things to cool off. The Fed’s ongoing reduction in its own bond portfolio should further decrease support for stocks, bonds and even . 4 Borrowers
If you’re an existing borrower and don’t need to tap the market for money – say, you locked in a 30-year fixed-rate mortgage earlier this year or in 2021 – you’re in good shape. But everyone else who’s looking to access new credit is getting squeezed, whether that’s credit cards (more later), , , auto loans or whatever else you might need to borrow for. The is 11.08 percent, as of October 7, according to a Bankrate study. However, borrowers with better credit may still be able to access a lower rate. In 2021, the average rate was just 9.38 percent, when the fed funds rate was near zero. Besides these new borrowers, however, anyone with any kind of floating-rate debt is also feeling the sting of higher rates. For example, if you took out an adjustable-rate mortgage years ago, that loan may be resetting at higher rates and it may be pushing up your monthly payment. 5 Credit cards
Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is closely related to the federal funds rate. The Fed’s decision means that interest on variable-rate cards will move higher now. Rates on cards are already at multi-decade highs and are still rising. “With [average] credit card rates already above 18 percent, cardholders can realistically expect to see their cards go to 19 percent and 20 percent in the months ahead,” says McBride. “Utilize zero percent or to shield yourself from coming rate hikes and put yourself on a path toward getting that credit card debt paid off once and for all.” Rates on credit cards are largely a non-issue if you’re not running a balance. 6 The U S federal government
With the , rising rates will raise the costs of the federal government as it rolls over debt and borrows new money. Of course, the government has benefited for decades from a secular decline in interest rates. While rates might rise cyclically during an economic boom, they’ve been moving steadily lower long term. For now, the interest rates on 10-year and 30-year Treasurys are running well below inflation. As long as inflation remains higher than interest rates, the government is slowly taking advantage of inflation, paying down prior debts with today’s less valuable dollars. That’s an attractive prospect for the government, of course, but not for those who buy its debt. High inflation and a could play into the upcoming U.S. midterm elections as well. With the balance of power in Congress at stake, the turmoil could encourage Americans to cast their votes . Bottom line
Inflation has been running hot over the last couple of years, and the Fed is aggressively raising interest rates to combat it. So plan carefully for how to take advantage, for example, by being more discriminating when it comes to shopping for rates on your savings accounts or CDs. One option for those looking for some protection against inflation is the , which now offers a solid annual interest rate of 6.89 percent. SHARE: Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles