The Covid era of free money is over.
After the Fed's historic rate hike Wednesday, Americans will start to see higher borrowing costs.
Every time the Fed raises rates, it becomes more expensive to borrow. That means higher interest costs for mortgages, home equity lines of credit, credit cards, student debt and car loans. Business loans will also get pricier, for companies large and small.
For most Americans, the most tangible way this is playing out is with mortgages, where expectations of rate hikes have already driven up rates: A 30-year fixed-rate mortgage averaged 5.1% in the week ending April 28, up sharply from under 3% in November.
Higher mortgage rates will make it harder to afford home prices that have skyrocketed during the pandemic. That weaker demand could cool off home prices.
On the plus side, cash sitting in bank accounts will finally earn something (albeit not much).
For savers, money stashed in savings, certificates of deposit (CD) and money market accounts earned almost nothing during Covid (and for much of the past 14 years, for that matter). Measured against inflation, savers have lost money. But these savings rates will rise as the Fed moves interest rates higher. Savers will start to earn interest again.
But this takes time to play out. In many cases, especially with traditional accounts at big banks, the impact won't be felt overnight. And even after several rate hikes, savings rates will still be very low — below inflation.
The high cost of living is causing financial headaches for millions of Americans, and it will be a bit before the Fed's interest rate hikes start chipping away at inflation. Even then, inflation will still be subject to developments in the war in Ukraine, the supply chain mess and, of course, Covid. Read more