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The End of Low Inflation in the U.S.
The era of low inflation in the United States came to a close last year. Consumers, who had largely refrained from making significant purchases during the pandemic, resumed their spending with vigor. Despite shortages in some goods and services, many were eager to use their savings, which had grown substantially during the pandemic.
Inflation and Interest Rate Hikes
More money chasing fewer goods is a classic recipe for inflation, and that’s precisely what happened in 2022. To combat rising costs, the Federal Reserve initiated the most rapid series of interest rate hikes in 40 years. This marked the most significant economic shift in a decade.
The financial landscape changed dramatically over the 12 months following the initial rate hike in March 2022. Both economic experts and consumers have been closely monitoring indicators to determine if these rate hikes have successfully steered the economy away from a recession. In this report, using data from Experian and other sources, we explore the impact of these increases on consumer credit, loans, and savings.
Benchmark and Average Interest Rates and Yields
| March 2022 | March 2023 | Change (Percentage Points) | |
|---|---|---|---|
| Federal funds | 0.25% | 5.00% | +4.75 |
| Mortgage | 4.67% | 6.32% | +1.65 |
| Credit card | 16.17% | 20.92% | +4.75 |
| Auto (72 month, new vehicle) | 4.54% | 6.97% | +2.43 |
| Savings | 0.06% | 0.37% | +0.31 |
Source: Federal Deposit Insurance Corp., Federal Reserve, and Freddie Mac
Mortgage Rate Increases and Homeownership Costs
Average mortgage rates were already on the rise from their sub-3% levels for a fixed-rate 30-year conventional mortgage before the Fed’s first key rate hike in March 2022. By then, the average rate was already 4.67%. As mortgage lenders faced rising lending costs, numerous rate increases by the Fed were inevitable to tame inflation, which was running at about 8% annually in spring 2022.
Although the federal funds rate influences mortgage rates, the relationship is not direct. Traditionally, mortgage rates are more closely tied to long-term bonds issued by the U.S. Treasury. Over the past year, the yield of these bonds increased from 2.32% to 3.48% in March 2023, similar to the 1.65 percentage point increase in 30-year mortgage rates.
Homebuyers are highly sensitive to interest rate changes. When mortgage rates were low, the number of mortgages and refinances was nearly double compared to when rates were higher.
Credit Card Rates Climb Past 20%
Credit card APRs closely track the Fed rate since most variable rate credit cards are based on the prime rate, which is directly influenced by the Fed’s actions. Consumers usually see these APR changes one or two billing statements later.
Last year, the average credit card APR increased from 16.17% in March 2022 to 20.92% this spring, mirroring the rate hikes over the past year. Despite this, balances continue to rise, partly due to increased spending following the pandemic.
Deposit Yields Still Low Despite Growth
When Fed rates were low in early 2022, most banks offered minimal returns on savings. Despite significant Fed rate hikes over the past year, some banks still offer very low yields on deposits. Even with the key Fed interest rate at 4.50% in March 2023, the average annual percentage yield (APY) for savings accounts was just 0.37%.
Big banks typically offer lower savings APYs than smaller banks or online-only banks. As of April 2023, many of the largest banks in the U.S. were still paying less than 0.50% APY for ordinary savings accounts. However, many online-only banks, which have lower overhead costs, offered savings account rates above 4% APY as of April 2023.
Some depositors are already moving their savings to banks offering higher yields, with some banks reporting sudden new deposit inflows from low-interest yielding banks.
The Bottom Line
Fed watchers do not expect the current pace of rate increases to continue, so borrowing costs and savings yields are unlikely to rise much further in the coming months. However, rates and yields may not remain static. Supply and demand will play a larger role in setting borrowing rates for consumers considering new purchases. Lenders, although more cautious, still prefer to make loans to creditworthy consumers, making credit scores as important as ever. Savers need to shop for competitive rates to earn meaningful interest on their cash.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate the changing financial landscape and find the best mortgage solutions for you.
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