How will raised interest rates hit Californians? With high living costs, here’s what to know

For the first time since 2018, the Federal Reserve is raising its benchmark short-term interest rates to combat inflation, and will continue to do so six more times later this year.

The Fed approved a quarter-point hike in interest rates Wednesday, after keeping rates low to induce economic growth during the recession the past few years. With the projected increases, the short-term rate is expected to boost between 1.75% to 2% at the end of 2022.

This comes after U.S. inflation soared to a record 40-year-high of 7.9% in the past year, as costs for housing, food and gas continued to surge.

Economy experts broke down what the interest rate hike means for Californians:

Are California residents going to see higher costs, compared to other states?

Potentially. Suzanne O’Keefe, an economics professor at California State University, Sacramento,said that since the Federal Reserve sets short-term lending rates at a national level, she does not anticipate California to see different effects of the hike compared to the rest of the country.

Barry Broome, the president and CEO of the Greater Sacramento Economic Council, said he thinks the average Californian might not notice the hike too much, unless the interest rates go up a full percentage point.

But since the cost of living is high in California, Colleen McCreary, consumer financial advocate at Credit Karma said that residents might feel some impacts, especially if they are a first-time home buyer.

“The Fed’s rate hike doesn’t directly impact fixed mortgage rates, in fact, mortgage rates have already been on the rise as a result of record-high inflation. However, with more rate hikes on the horizon, we could expect to see a continuation of this trend,” she said.

Since housing supply is low in California and demand remains high, prices will stay competitive.

“All of this could impact first time home buyers who should expect to pay a premium in this market,” she said.

Will consumers have to pay more now that interest rates are increasing?

Yes.

The Federal Reserve is the central bank of the U.S. and often lends money to commercial banks, such as Chase and Wells Fargo.

O’Keefe said that by increasing the interest rates of federal funds, banks will have to pay that rate and they may raise the interest rates they charge customers as a result.

According to the Associated Press, interest rate hikes also means higher loan rates for some consumers and businesses.

Not only will borrowing costs rise, so will variable rate loans, such as private student loans, adjustable-rate mortgages, home equity lines of credit and credit cards, said McCreary, with Credit Karma.

“Most notably, consumers with outstanding credit card debt should expect to pay more in interest, as credit card rates closely trace the Fed’s moves,” McCreary said.

I have a low credit score. What does this interest rate hike mean for me?

Consumers with lower credit scores might feel the pinch of higher interest rates, said McCreary.

“For example, if someone with a lower credit score is looking to purchase a car, but needs an auto loan to do so, it’s likely they’ll be met with a higher interest rate than someone with a higher credit score,” she said. “That’s because lenders view them as more risky borrowers and interest rates are up overall.”

This goes the same for those in the market for mortgages, credit cards and loans.

If you want to boost your credit score, McCreary recommends paying outstanding balances regularly and on-time, or paying in full when you can.

“This is important because payment history makes up about 35% of a person’s overall credit score,” she said.

If you have a lot of credit card debt, McCreary advises that you consolidate it onto a personal loan or balance transfer card to streamline the debt into one monthly payment. Also, keep your credit cards open, even if you don’t use all of them. This showcases your long credit history which can help enhance your credit score.

How does increasing interest rates control inflation?

With higher rates, businesses and consumers are going to borrow less money, O’Keefe said. People are going to pursue fewer projects and buy less.

“If they buy less then that should reduce demand, somewhat, and bring prices back,” she said. This will tame inflation so that prices do not continue to rise so quickly.

But this doesn’t mean the country is in the clear from inflation. The Fed is facing a “delicate challenge,” according to an AP report, in which “[i]f it tightens credit too aggressively this year, it risks undercutting the economy and possibly triggering a recession.”

O’Keefe said the federal bank is proceeding with caution by raising borrowing rates gradually, starting at very low levels.

Broome, who has worked in economic development for more than 30 years, said tackling inflation will take a while.

“You’ll start to see things more normalized, but we’re going to struggle,” Broome said. “We’re going to struggle for another two or three years, easy.”

This story was originally published March 16, 2022 at 3:16 PM.