The Fed rate rises again. Here’s what you need to know.
November 4, 2022
On Wednesday, November 2, the Federal Open Market Committee (the Fed) implemented a raise to the Fed Rate of .75 percentage points. This is the most recent in a consecutive string of rate hikes meant to curb inflation. The Fed last raised the rate by .75 percentage points on September 21, and on July 28. In July, we spoke with our VP of Risk Management, John Thomasian, about what the Fed Rate is and why it changes (read more here). This month, we spoke with him about what November’s rate change could mean. We discussed the future of the housing market, the stock market, and your deposit and savings accounts. We want to ensure our members have the guidance they need to make sound financial decisions and plan for the future.
How might the rate change affect the housing market for people looking to buy or sell?
The Fed increasing the Federal Funds Rate has a significant effect when it comes to financing a home. The cost to finance a new house becomes much more expensive to the buyer/borrower. Higher interest rates decrease the buyer’s purchasing power. For example: say buyers who were prequalified for $400,000 at a 5% rate in June of this year find the house they would like to buy in September with financing of $400,000. In September, the rate is now 7%. They can only qualify to finance $300,000 at that rate. As a result, the sale can no longer proceed.
Sellers will be forced to decrease their listing prices in order to attract buyers because of higher financing rates. Home sales year-to-date in the local region have decreased by approximately 30% from the previous year. Houses were selling at a record pace in 2021 with average listings lasting 30 days or under. Today’s current listings are staying on the market for a much longer period. We are continuing to see listing prices decrease as a result.
How might the rate change affect people with money in the stock market?
With rate increases effecting multiple sectors of the economy, it has led to high volatility throughout the stock market. The majority of economists are predicting an economic recession as a result of the rate increases. This has changed the stock market to turn from a bull market (when the stock market is gaining value) to a bear market (when stock prices fall) over the past year. As a result, the three major indices have all realized significant losses year-to-date. During these times, investors have looked for a safe alternative and have withdrawn their cash from the stock market to open certificates which will obtain a better return. Webster First has provided certificate specials throughout the year to give members a higher rate of return without having to worry about losing money. Now is a great time for the savers out there to take advantage of these higher yielding accounts!
How might the rate change affect the price of goods during the holiday shopping season?
The Fed’s primary concern right now is to curb inflation and their tool to do so is increasing borrowing rates. Although this doesn’t have an immediate effect and could take some time before we realize results, the ultimate goal is to bring down prices of goods. Most recent data shows inflation continuing to increase which will make holiday shopping more expensive. Overtime, as the rate increases take effect we should see prices on goods go down. Unfortunately, I don’t think it happen in time for the upcoming holiday shopping season.
How might the rate change affect people with adjustable rate loans and what advice would you have for them?
Adjustable rate loans can have pros and cons to them. The term, when they are scheduled to increase, the incremental increase amount, what index they are based off of, the time period they were opened in, and the amount they can increase by, all contribute to advantages and disadvantages to the borrower. Typically, financial institutions price their adjustable rate loans to be lower than their fixed rate loans.
About adjustable rates
Adjustable rate loans are usually fixed for a certain duration of the loan where the rate increase won’t come in effect for a number of years. For example: one of the Webster First’s most popular products is its 7 & 1 adjustable rate mortgage (ARM). Those loans are fixed at their original rate for the first 7 years and are scheduled to adjust only after that time period. Interest rates on a 7 & 1 adjustable rate mortgage are approximately 1% lower compared to a 30 year fixed rate mortgage.
This makes the adjustable rate mortgage more affordable for the first 7 years of the loan. It allows borrowers to save more in financing cost during that time period vs. the higher fixed rate. As an example: say your loan amount was $350,000 with a variable rate 7 & 1 @ 5.00%. Compared to a fix rate @ 6.00%, the savings in the first 7 years would be $24,373 in interest. To compare interest on adjustable rate and fixed rate loans, utilize Webster First’s calculators.
Interest rates are expected to decrease once the Fed gets inflation under control. If fixed rate mortgages drop by 2%-3% 5 years into a 7 & 1 adjustable rate mortgage, it allows the borrower the opportunity to refinance before it adjusts. They could potentially see no rate increase when the adjustable rate comes into effect because the index it’s tied to didn’t increase, or it decreased by the time the rate adjustment comes.
The best advice I can give to borrowers with adjustable rate loans is to understand the terms of their loan so they can plan accordingly. If you’re in an adjustable rate product that’s continually repricing now, look at fixed rate refinance options as an alternative. Credit Card debt is a great example of loans that continually price their interest rates up or down depending on the Fed rate. An alternative is to open a personal loan at a fixed rate and term where you don’t have to worry about interest rates going up.
Can members feel safe with their money at Webster First?
Webster First takes great pride in being able to offer its members exceptional customer service and superior products to serve all their financial needs. The management team has positioned the Credit Union’s balance sheet for all interest rate environments. Our financial strength has given us the opportunity to offer competitive rates on our lending and deposit products. This in turn allows Webster First’s members to take advantage of our rates and products so they can be financially successful. Webster First is consistently awarded a 5-star rating from BauerFinancial. BauerFinancial is an independent company that rates all banks and credit unions based on reporting and financial data. We’ve achieved 5-stars for over 30 consecutive quarters. Though the economy is continually changing, Webster First remains strong. With those statistics our members can rest assured knowing their money is safe with us!