On Money & More – August 2023

The Federal Reserve’s recent tightening cycle, initiated in 2022, is making waves in the everyday lives of ordinary Americans—from Wall Street all the way to California Street, here in Jacksonville. The rate hikes, aimed at curbing inflation and stabilizing the economy, affect everything from car loans to credit card debt, and have significant implications for household budgets across the nation.

First, rising interest rates hit directly on the cost of borrowing. The average American looking to purchase a car or home now faces steeper financing costs. The auto loan interest rate, previously at 4%, can shoot up to 6% or more. For a $30,000 car loan over five years, this translates into roughly $1,500 extra over the life of the loan.

Similarly, higher mortgage rates mean costlier home ownership. For instance, a half-point interest rate increase on a $300,000, 30-year mortgage results in approximately $30,000 more in total repayments. Now consider that many mortgage rates have risen from around 3% to over 7%, and the cost of home ownership has become unattainable for many (which has also made it harder for homeowners to sell their homes).

In addition, the burden of credit card debt has grown. As most credit cards have variable rates, increased interest means higher monthly payments, contributing to a mounting debt crisis.

On the brighter side, savers benefit from increased rates. Higher yields on CDs, and other interest-bearing assets such as money market funds, provide a welcome boost for those with cash on hand. Money market funds now yield around 5%—rates not seen in many years. However, this is a double-edged sword, as it may discourage consumer spending, potentially slowing the economy.

Furthermore, rate hikes impact the job market. Rising borrowing costs can lead to reduced business investment, subsequently slowing job growth. While the current unemployment rate has remained steady, future hikes could threaten job security for some if the Fed “successfully” slows down the economy.

It is crucial, however, to understand that the Fed’s decision was not arbitrary. By 2022 the US economy was showing signs of overheating, with inflation rates surging to uncomfortable levels over 9%. We’ve all experienced the impacts of inflation, and the Fed’s actions are aimed at slowing inflation to their target of 2%. The rate tightening cycle aims to reel in these runaway prices, bringing long-term economic stability, which is good for consumers and businesses alike.

Overall, the higher interest environment presents a mixed bag for the average American. It serves as a wake-up call to manage debt wisely, promotes saving, but also rings alarm bells for would-be borrowers and those on shaky job ground. As we sail through these choppy economic waters, awareness and adaptability will be crucial for navigating the tide. If you would like to talk about how today’s higher rates impact you, please give us a call at Cutler!

All opinions and data included in this commentary are as of July 11, 2023 and are subject to change without notice.  The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or individual investment advice including the asset allocation provided. Nothing herein should be construed as tax advice. This article is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase or sell securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Investing involves risk, including the potential loss of principle. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.