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The Changing Financial Landscape: Insights from O1ne Mortgage

The era of low inflation in the U.S. came to an 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 utilize their savings, which had generally increased during the pandemic.

More money chasing fewer goods is a classic recipe for inflation, and this is precisely what occurred in 2022. To combat 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 swiftly and dramatically in the 12 months following the initial rate hike in March 2022. During this period of uncertainty, both economic experts and consumers have been closely monitoring indicators to determine if the rate hikes have successfully steered the economy away from a recession. In this report, with the help of Experian data and other measures, we explore the effects these increases have had on consumer credit, loans, and savings.

Benchmark and Average Interest Rates and Yields

March 2022 to March 2023 saw significant changes in various interest rates:

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

Source: Federal Deposit Insurance Corp., Federal Reserve, and Freddie Mac

To summarize, part of the Federal Reserve’s mandate 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 goal was to reduce demand by making borrowing more expensive, thereby slowing down price increases. While these rate increases appear to have had some effect—inflation decreased from its peak of 9% in June 2022 to 5% in March 2023—they have also slowed down consumer and business purchases that drive the economy.

In the first quarter of 2023, the nation’s economy grew by 1.1%—a modest growth, but growth nonetheless. It remains to be seen whether the Federal Reserve’s 10 rate increases over the past year will ultimately result in subdued inflation (the Fed is targeting a 2% inflation rate) without completely halting economic growth.

Mortgage Rate Increases and 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 influences 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.

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, 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. Despite Fed rate hikes totaling more than 4 percentage points over the past year, some banks still pay 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%.

Big banks usually offer retail customers 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 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 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, especially, need to shop for competitive rates to earn meaningful interest on their cash.

For any mortgage-related needs, call O1ne Mortgage at 213-732-3074. Our team is ready to assist you with confidence and expertise.

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