The end of low inflation in the U.S. arrived last year as consumers who were largely sidelined from making big purchases during the pandemic renewed their consumption with a vengeance. Despite shortages for some items and services, consumers were ready and willing to tap their savings accounts that had by and large grown flush during the pandemic.
But more money chasing fewer goods is one recipe for inflation, and that's exactly what transpired in 2022. In an attempt to tamp down rising costs, the Federal Reserve kicked off the most rapid series of interest rate hikes in 40 years—the most recent economic shake-up in a decade that's already had more than a few.
The financial landscape changed quickly and dramatically during the 12 months that followed the initial rate hike in March 2022. During this period of uncertainty, economic experts and consumers alike have been paying attention to the indicators that will tell us if rate hikes have successfully steered the economy away from a recession. In this report, with the help of Experian data and other measures, we step through the effects these increases have had on consumer credit, loans and savings.
|Benchmark and Average Interest Rates and Yields|
|March 2022||March 2023||Change (Percentage Points)|
|Auto (72 month, new vehicle)||4.54%||6.97%||+2.43|
Source: Federal Deposit Insurance Corp., Federal Reserve and Freddie Mac
Note: Federal funds rate is the upper bound targeted by the Federal Reserve
To briefly recap: Part of the mandate of the Federal Reserve is 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 Fed's hope was that the added cost to borrow would stem demand and thereby slow down price increases. While these rate increases appear to have had some effect—inflation was down from its peak of 9% in June 2022 to 5% this March—it's also slowing down the consumer and business purchases that drive the economy.
In the first quarter of 2023, the nation's economy grew by 1.1%—low growth, but growth nonetheless. It remains to be seen whether the Federal Reserve's 10 rate increases over the past year ultimately result in subdued inflation (the Fed is targeting a 2% inflation rate) without completely shutting down economic growth.
Mortgage Rate Increases Pushed Up Already Expensive Homeownership Costs
Average mortgage rates were already climbing from their sub-3% levels (for a fixed-rate 30-year conventional mortgage) well before the Fed issued its first key rate hike of the cycle in March 2022. By then, the average rate as measured by Freddie Mac was already 4.67%. As mortgage lenders were already seeing their lending costs rise, 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 sways mortgage rates, it's not a direct relationship. Traditionally, market observers 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, or 1.16 percentage points. That's similar to the 1.65 percentage point increase in 30-year mortgage rates as measured by Freddie Mac.
Homebuyers are very sensitive to interest rate changes, in both directions. When mortgage rates were low—and they couldn't get much lower than the rock-bottom rates some homeowners received in 2020—the number of mortgages and refinances was nearly double what it was when rates were higher.
|Monthly Originations by Average Mortgage Rate, February 2020 to April 2023|
|Avg. 30-Year Fixed Rate Mortgage||Number of Monthly Originations|
|Less than 3.00%||1,731,000|
|3.00% - 3.49%||1,366,000|
|3.50% - 5.49%||945,000|
|5.50% - 7.08%||537,000|
Sources: Experian, Freddie Mac
Note: Not all mortgage originations are 30-year conventional mortgages, and borrowers may have received higher or lower rates than average.
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 will want to compare rates from multiple lenders should they shop for a new home this year.
Credit Card Rates Climb Past 20%
Credit card APRs track the Fed rate nearly exactly 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, either, as the average credit card APR increased from 16.17% in March 2022 to 20.92% this spring—an increase that mirrored the rate hikes over the past year. Nonetheless, balances continue to increase, partly as a function of the interest rate increases, but also due to increased spending following the pandemic.
Deposit Yields Still Low Despite Growth
When Fed rates were low in early 2022, most banks were paying consumers next to nothing on their savings. And despite Fed rate hikes totalling more than 4 percentage points over the past year, some banks still are paying next to nothing for some customer deposits. Even with the key Fed interest rate at 4.50% in March 2023, the average annual percentage yield (APY) for savings accounts was still just 0.37%.
Average Savings APYs Since Fed Rate Hikes Began
Big banks usually offer retail customers lower savings APYs than smaller banks or online-only banks. At least for now, many of the largest banks aren't increasing their deposit yields by much. As of April 2023, seven of the 10 largest banks in the U.S. were still paying small deposit accounts less than 0.50% APY for ordinary savings accounts.
Fortunately for consumers, there are still more than 4,000 banks in the U.S., and a similar number of credit unions, many of which are willing to pay consumers much more than average for their savings. Often, they're only a mouse click away: Many online-only banks, which only have a web presence but also lower overhead costs, offered savings account rates above 4% APY as of April 2023.
And at least some depositors are already on the march for savings, with some banks reporting sudden new deposit inflows from low-interest yielding banks, which, in many cases, still pay the same on deposits before the rate hikes.
The Bottom Line
Fed watchers aren't expecting this pace of rate increases to continue, so both borrowing costs and savings yields aren't likely to increase much further in the coming months. But that doesn't mean rates and yields will stay exactly where they are this spring. Supply and demand will play a larger role for setting borrowing rates for consumers considering new purchases. Lenders, although more cautious to whom they lend, still would prefer to make loans to creditworthy consumers, making credit scores as important as ever. Savers, especially, need to shop for competitive rates to earn meaningful interest on their cash.