Market observers predict that against the backdrop of rising energy prices and ongoing tensions between the US and Iran, the Federal Reserve will announce a 25-basis-point increase in the federal funds rate on Wednesday. For ordinary consumers, this rate hike will increase various borrowing costs, and American households are already under considerable financial pressure. If this rate hike goes through, it will be the Fed's first rate increase in over three years, and this move may conflict with Trump's desire to keep the federal funds rate low. The federal funds rate is the benchmark interest rate for overnight lending between banks. Consumers do not directly borrow at this rate, but changes in the benchmark rate are transmitted throughout the economy, affecting interest rates on various loan and deposit products.

Consumer credit costs are rising across the board, and credit card interest rates may break historical records.

The Federal Reserve's increase in benchmark interest rates raises borrowing costs for businesses and households, aiming to cool the economy and suppress inflation. This increases costs for mortgages, auto loans, and credit card debt, although interest income on deposits will also rise. Short-term consumer debt rates are mostly linked to the prime lending rate, which is typically 3 percentage points higher than the federal funds rate. Long-term rates are more influenced by macroeconomic factors such as inflation expectations. Most credit cards use floating rates, directly linked to the Fed's benchmark rate. A rise in the federal funds rate will drive up the prime lending rate, and credit card rates will generally follow suit within one to two billing cycles. Mark Zandi, chief economist at Moody's Analytics, said, " Current credit card rates are already over 20%, and once the Fed starts raising rates, they are likely to continue rising, reaching record highs ." Auto loan interest rates are fixed after disbursement, but new auto loan rates are affected by interest rate hikes. A recent WalletHub analysis shows that after the Federal Reserve raised interest rates by 25 basis points, the average annualized interest rate for new 48-month auto loans is expected to rise by about 12 basis points in the coming months. Federal student loans have fixed interest rates after disbursement, but based on the latest 10-year Treasury auction results in May, interest rates for future federal student loan applications have already increased. Private student loans mostly use floating rates, linked to the London Interbank Offered Rate (LIBOR), prime lending rate, or short-term Treasury bond rates. After the Federal Reserve raises interest rates, the interest expenses for these borrowers will also increase, with the specific increase depending on the benchmark interest rate chosen.

The impact on the mortgage market is diverging, with fixed-rate mortgages and floating-rate mortgages offering drastically different experiences.

The pricing of long-term mortgages primarily follows the 10-year Treasury yield, which is the benchmark for the vast majority of mortgages. Last week, the 10-year Treasury yield briefly broke through 4.95%, reaching its highest point since October 2023. As a result, the average interest rate for a 30-year fixed mortgage exceeded 7% for the first time in over a year. Jeff DerGurahian, Chief Investment Officer and Chief Economist at LoanDepot, said, "A Fed rate hike does not necessarily mean that 30-year fixed mortgage rates will rise in tandem. If the market has already priced in this rate hike, and the Fed simultaneously signals that this is a measure to steadily push inflation back to the 2% target level, investors may see this as a positive signal for long-term bonds." He added that if policy communication goes as expected, and long-term Treasury yields remain stable or even decline, 30-year fixed mortgage rates will also remain stable. Essentially, the Fed is now moderately applying the brakes on the economy to prevent a further acceleration of inflation. Other housing loans are more directly affected by the rate hike. Adjustable-rate mortgages, also known as ARMs, and Home Equity Credit Lines (HELOCs) both have interest rates linked to the prime lending rate. Most adjustable-rate mortgages adjust their rates annually after the initial fixed-rate period, while HELOC rates change immediately with the benchmark rate.

Interest rate hikes are not all bad news; deposit returns are poised for improvement.

In a rising interest rate environment, deposit rates tend to rise in line with the federal funds target rate, a benefit that is easily overlooked by savers. Mark Hamrick, an economic analyst and founder of the Hamrick Brief, said, "Higher interest rates bring a benefit that is easily overlooked by the market: savers have the opportunity to get higher deposit yields." He also cautioned that whether borrowing or saving, it is necessary to compare various interest rates to select the best option, avoiding excessive borrowing costs while maximizing deposit returns.

Conclusion

In summary, the US household debt market will likely see significant divergence following the Fed's latest rate hike. Repayment pressures will increase rapidly for products like credit cards, private student loans, and variable mortgages linked to the prime lending rate; while the trend for 30-year fixed-rate mortgages will depend more on the US Treasury market's interpretation of the Fed's policy, making it uncertain. Although the rate hike increases the burden on indebted individuals, savers will reap higher interest rates on their deposits. This rate hike marks the Fed's resumption of rate increases after three years; subsequent policy communication and policy disagreements with the White House will continue to impact the financial costs of US residents and influence global asset prices.