The End of Low Inflation: Navigating the New Financial Landscape

The era of low inflation in the U.S. came to an abrupt end last year as consumers, who had largely refrained from making significant purchases during the pandemic, resumed their spending with vigor. Despite shortages in some goods and services, consumers were eager to tap into their savings, which had grown substantially during the pandemic. This surge in spending, combined with limited supply, created a perfect storm for inflation, which surged in 2022.

In response to rising costs, the Federal Reserve initiated the most rapid series of interest rate hikes in 40 years, marking the most significant economic shift in a decade. The financial landscape changed quickly and 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, we explore the effects of these increases on consumer credit, loans, and savings, with data from Experian and other sources.

Benchmark and Average Interest Rates and Yields

To understand the impact of the Federal Reserve’s actions, let’s look at the changes in key interest rates and yields from March 2022 to March 2023:

• Federal funds rate: 0.25% to 5.00% (+4.75 percentage points)
• Mortgage rates: 4.67% to 6.32% (+1.65 percentage points)
• Credit card rates: 16.17% to 20.92% (+4.75 percentage points)
• Auto loan rates (72-month, new vehicle): 4.54% to 6.97% (+2.43 percentage points)
• Savings account yields: 0.06% to 0.37% (+0.31 percentage points)

These changes reflect the Federal Reserve’s efforts to achieve price stability. As inflation began to rise in early 2022, the Fed responded by methodically increasing its key policy rate throughout the remainder of 2022 and into 2023. The goal was to increase borrowing costs, thereby reducing demand and slowing down price increases. While these rate hikes have had some effect—bringing inflation down from its peak of 9% in June 2022 to 5% in March 2023—they have also slowed consumer and business purchases, which drive the economy.

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 well before the Fed’s first key rate hike in March 2022. By then, the average rate, as measured by Freddie Mac, was already 4.67%. As mortgage lenders faced rising lending costs, numerous rate increases by the Fed were virtually inevitable if inflation, running at about 8% annually in spring 2022, was to be tamed.

Although the key federal funds rate influences mortgage rates, the relationship is not direct. Market observers often see a closer relationship between mortgage rates and 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, a rise of 1.16 percentage points. This is similar to the 1.65 percentage point increase in 30-year mortgage rates as measured by Freddie Mac.

Homebuyers are highly sensitive to interest rate changes. When mortgage rates were low, the number of mortgages and refinances nearly doubled compared to periods when rates were higher. Here are the monthly originations by average mortgage rate from February 2020 to April 2023:

• Less than 3.00%: 1,731,000 originations
• 3.00% – 3.49%: 1,366,000 originations
• 3.50% – 5.49%: 945,000 originations
• 5.50% – 7.08%: 537,000 originations

Freddie Mac and Fannie Mae, the two government-sponsored enterprises that buy many of the nation’s mortgages from lenders, expect conventional 30-year rates to sit between 6.20% and 6.60% throughout the remainder of 2023. Prospective buyers should compare rates from multiple lenders if they plan to shop for a new home this year. At O1ne Mortgage, we are committed to helping you find the best mortgage rates. Call us at 213-732-3074 for personalized mortgage services.

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 was no exception, as 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 these increases, balances continue to rise, partly due to the interest rate hikes and increased spending following the pandemic.

Deposit Yields Still Low Despite Growth

When Fed rates were low in early 2022, most banks paid consumers next to nothing on their savings. Despite Fed rate hikes totaling more than 4 percentage points over the past year, some banks still offer minimal yields on savings accounts. 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 usually offer lower savings APYs than smaller banks or online-only banks. As of April 2023, seven of the 10 largest banks in the U.S. were still paying less than 0.50% APY for ordinary savings accounts. Fortunately, there are more than 4,000 banks and a similar number of credit unions in the U.S., many of which offer higher yields. Online-only banks, which have lower overhead costs, often provide savings account rates above 4% APY.

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. If you’re looking to maximize your savings, it’s essential to shop around for competitive rates.

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 significantly 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 about whom they lend to, 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.

At O1ne Mortgage, we understand the complexities of the current financial landscape and are here to help you navigate it. Whether you’re looking for a mortgage, refinancing options, or advice on maximizing your savings, our team of experts is ready to assist you. Call us today at 213-732-3074 for all your mortgage service needs. Let us help you make informed financial decisions and achieve your homeownership goals.