Fed slows pace of rate hikes, raises rates a quarter point. What that means for your finances.

The Federal Reserve whittled down the size of its rate increases again, with a quarter-point hike, on Wednesday. But the smaller rate hike is unlikely to provide much relief to already squeezed consumers.

The Fed boosted interest rates for an eighth consecutive time, but only by 0.25 percentage point, down from the half-point hike in December and the four consecutive three-quarter percentage-point increases before that.

A quarter-point increase in the short-term benchmark fed funds rate lifts the target range to between 4.5% and 4.75%, the highest level since 2007 and up from 0% to 0.25% at the start of 2021.

The slower pace is intended to give the economy a chance to digest the Fed's earlier string of aggressive hikes. But consumers, having already felt the impact of those rate hikes, are already reeling.

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Credit card rates are at record highs and while mortgage rates have eased lately, they are still at the highest level in more than a decade. A Bankrate survey last month showed that 25% of Americans faced with a $1,000 emergency would use a credit card and pay it off over time. That was the highest share since Bankrate began polling this data in 2014.

How high will interest rates go?

With inflation easing to 6.5% in December but still more than triple the Fed's 2% goal, it appears the Fed believes it will need to keep raising rates to slow the economy and cool inflation further.

In a statement after its two-day meeting on Wednesday, the Fed repeated that “ongoing (rate) increases…will be appropriate” to bring down yearly inflation to the Fed’s 2% goal.

Although the Fed doesn’t directly control consumer interest rates, its rate increases ripple through the economy and ultimately, slow demand and inflation.

The Fed will continue to monitor the jobs market as it weighs future rate hikes. That market has been more resilient than many expected and could keep inflation high. Jobs provide money for consumers to spend, fueling demand and inflation.

Job openings in the U.S. rose to a five-month high of 11 million in December, which meant there were 1.9 job openings for every unemployed person, the Labor Department said Wednesday morning.

"Net, net, the labor market continues to defy the recession predictions of experts," said Christopher Rupkey, chief economist at FWDBONDS in New York.

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No matter which way the Fed goes with rate hikes, consumers aren't likely to get much relief as they're already suffering from the nonstop barrage of rate hikes this past year.

This "isn’t going to be a big deal for most cardholders," said Matt Schulz, LendingTree's chief credit analyst. "It makes an already tough time for cardholders just a little bit tougher."

How does this affect my plans to buy a house?

Homeowners with existing fixed-rate mortgages won’t see any changes. Recent and prospective homebuyers are feeling the higher rates, but notably, mortgage rates have stabilized recently and even dipped as inflation has shown signs of having peaked.

“Mortgage rates could actually remain near where they are over the coming weeks, or even continue to trend down slightly," said Jacob Channel, LendingTree's senior economist. "The average rate for a 30-year, fixed-rate mortgage currently sits at 6.13%, down from its mid-November 2022 peak of 7.08%.” 

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It’s important to remember mortgage rates are still at the highest level since 2008. “These relatively high rates, combined with persistently high home prices, mean that buying a home is still a challenge for many,” Channel said.

To put into perspective just how much rising rates can impact borrowers, consider the average 30-year, fixed mortgage rate on Jan. 27, 2022, was 3.55%, 2.58 percentage points lower than the latest average of 6.13% on Jan. 26. On a $400,000 loan, a rate of 3.55% results in a monthly payment of about $1,807 (excluding additional costs like taxes and insurance).

On that same $400,000 loan, a rate of 6.13% results in a monthly payment of $2,432. That’s an extra $625 a month, an extra $7,500 a year, and an extra $225,000 over the 30-year lifetime of the loan.

How do higher interest rates affect the stock market?

The dual fear of high inflation and recession (or stagflation) has kept stocks under wraps, until lately. Stocks ended January higher and turned positive early Wednesday afternoon after the Fed rate increase.

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Higher rates make borrowing and business investment more expensive and cool consumer spending, which cuts into corporate profits. But some investors are hopeful that a resilient jobs market, which would continue to provide money to consumers, will allow them to keep spending and buffer corporate earnings.

Some analysts believe the markets have already priced in weaker corporate earnings and are already looking for a rebound.

"When earnings fall, stocks are more than twice as likely to rise as they are to fall," said Jeff Buchbinder, broker-dealer LPL Financial chief equity strategist. That's because "markets generally price in earnings declines well before they happen – maybe two or three quarters ahead. By the time earnings declines are in the books, stocks have moved higher in anticipation of the next earnings upcycle."

Morgan Stanley U.S. Chief Equity Strategist Mike Wilson sees this differently. He says the market's overly optimistic and that we'll see "the worst earnings recession since 2008."

How do Fed rate hikes affect credit cards?

Credit card interest rates are among the highest ones you'll pay with annual percentage rates already at record highs, but they're going even higher. That means your debt is going to keep getting more expensive unless you act now.

Not only is the average APR on a new credit card nearing 23.5%, but those accruing interest, meaning ones that carry a balance from month to month, was 20.40% in the fourth quarter, according to the Fed. That’s up nearly 2 full percentage points from the previous quarter's 18.43%, which was the highest since tracking began in 1994.

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Credit card balances also surged in the third quarter by 15% year-over-year, marking the largest increase in more than 20 years, propelling total credit card debt to $930 billion, just shy of the record, the New York Fed said. Credit cards are the most prevalent type of debt in the U.S., with more than 500 million open accounts and 191 million Americans with at least one credit card account, it said.  

Now that the Fed has raised rates by a quarter point, as expected, you'll pay $1,064, or an extra $17, in interest on a $5,000 balance over 25 months.

Cardholders have options, though, to lower their payments.

"Zero-percent balance transfer credit card offers are even more plentiful than they were a year ago and remain one of the best weapons Americans have in the battle against credit card debt," said Schulz. "Low-interest personal loans may be an option as well. The rates on new personal loan offers have climbed recently as well, but if you have good credit, you may be able to find options that feature lower rates than what you currently have on your credit card."

How do Fed rate hikes affect auto loans?

Fed rate increases trickle down to auto loans, but the toll should be less painful. Typically, the cost of a quarter-point increase in rates on a $25,000 loan is just a few dollars extra per month, experts say.

The average rate on newly financed vehicles climbed to 6.5% in the last three months of 2022, compared with 5.7% in the prior three months and 4.1% in the year-ago period. Rates on used financed vehicles climbed to 10%, compared with 9% and 7.4%, respectively. To lower monthly payments, car shoppers were putting more money down, Edmunds said.

"Just as new and used car prices finally started to cool off (late last year), rapidly rising interest rates created an even greater barrier to entry for consumers who rely on financing — which is the vast majority of car shoppers," said Ivan Drury, Edmunds' director of insights. 

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How does the Fed's decision affect bank savings interest rates?

For savers, deposit rates are reaching highs not seen in more than a decade, and they’re likely to continue climbing if the Fed continues to raise rates.

"With rates still rising and inflation now declining, it is the best of both worlds for savers," said Greg McBride, Bankrate's chief financial analyst.

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But beware of longer-dated savings vehicles.

"Long-term CD rates have started to fall at banks and credit unions," said Ken Tumin, a senior industry analyst at Lending Tree and founder of DepositAccounts.com. "At several online banks, 1-year CD rates are higher than 5-year CD rates. This condition is similar to what has been seen with Treasury yields.”  

The yield on 30-year Treasuries has declined this year on bets inflation has peaked, and the Fed will soon stop raising rates and maybe, even cut rates in late 2023. In contrast, the yield on shorter maturities has stayed elevated because the Fed is still raising rates in the short term.

If investors are looking to collect as much yield as they can on their savings, look online. The average online savings account yield is 3.31%, a 1-year CD yield is 4.37% and a 5-year CD yield is near 4.04%. Those compare to the average brick-and-mortar savings account yield of 0.28%.

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.    

This article originally appeared on USA TODAY: Fed rate hike shrinks, but many already hurting may not even notice