How higher interest rates will affect Americans' finances

WASHINGTON (AP) — Americans who have long enjoyed the benefits of historically low interest rates will have to adapt to a very different environment as the Federal Reserve embarks on what's likely to be a prolonged period of rate hikes to fight inflation.

Record-low mortgage rates below 3%, reached last year, are already gone. Credit card interest rates and the costs of an auto loan will also likely move up. Savers may receive somewhat better returns, depending on their bank, while returns on long-term bond funds will likely suffer.

The Fed's initial quarter-point rate hike Wednesday in its benchmark short-term rate won't have much immediate impact on most Americans' finances. But with inflation raging at four-decade highs, economists and investors expect the central bank to enact the fastest pace of rate hikes since 2005. That would mean higher borrowing rates well into the future.

On Wednesday, the Fed's policymakers collectively signaled that they expect to boost their key rate up to seven times this year, raising its benchmark rate to between 1.75% and 2% by year's end. The officials expect four additional hikes in 2023, which would leave their benchmark rate near 3%.

Chair Jerome Powell hopes that by making borrowing gradually more expensive, the Fed will succeed in cooling demand for homes, cars and other goods and services, thereby slowing inflation.

Yet the risks are high. With inflation likely to stay elevated, in part because of Russia's invasion of Ukraine, the Fed may have to drive borrowing costs even higher than it now expects. Doing so potentially could tip the U.S. economy into recession.

“The impact of a single quarter-point interest rate hike is inconsequential on the household budget,” said Greg McBride, chief financial analyst for Bankrate.com....