The benchmark rate is now just below 5%, its highest level since 2007.
Wednesday’s decision marks the ninth consecutive increase to the federal funds rate since the central bank started raising it last spring.
“Your mortgage rate, your auto loan, your small- business loan—pretty much the cost of borrowing money in any way, shape or form is built off that federal funds rate,” said Nathan Jefferson, an associate economist at the St. Louis Fed.
The Fed is pushing up these rates in an effort to cut demand and spending to bring inflation back down to its target of 2%, he said.
After a year, those increases have had a noticeable effect on the economy and consumer behavior around the country and the St. Louis region.
“When you hear about things happening nationwide, or major economic trends, you should know that that is, by and large, what’s happening in St. Louis as well,” Jefferson said.
The rate increases are more pronounced in industries where transactions are more closely tied to financing, he said.
“The sectors of the economy where people are borrowing money, where people are making large purchases, large investments: housing, manufacturing, auto loans,” Jefferson said. “Those are the sectors that have seen the most immediate effects of these interest rate increases.”
Higher interest rates have slowed the local housing market a bit, with fewer home purchases and minimal refinancing, said Tom Wind, U.S. Bank executive vice president of consumer lending. Instead, there’s been more lending activity tied to home improvement as people stay put and tap into the equity they may have built up in the past few years, he said.
“They’re thinking more and more about, ‘What can I do to fix up my home?’ whether that’s redo the kitchen, the bathroom, do an addition,” Wind said.
When it comes time to finance an improvement, consumers are conscious about the Fed’s increases and have been opting for loans that have a fixed interest rate, he said.
“They want to make sure that as they step in, they’ll be able to afford it and not going to be surprised going forward,” Wind said.
Even with the rate increases, the regional housing market is still relatively tight because the inventory of available homes remains much lower than it was before the pandemic, said Jean Lewis, president of the Southwestern Illinois Board of Realtors.
“Our inventory is less than one month’s inventory and we need five to six months of inventory for it to be a ‘normal’ market,” she said. “And we are not going to be able to catch up with that anytime soon.”
That low level of available homes means all-cash buyers are still active in the market, said Scott Haggerty, president of St. Louis Realtors.
“When you’re a cash buyer, typically, it doesn’t matter what the interest rate is because they are not obtaining a loan,” he said.
But for locals who do need to rely on financing for their purchase, it means their money isn’t going as far as it may have a few years ago, he said. That may mean changing their search parameters, whether that be losing a bedroom or looking for a new home that is significantly further from where someone lives now, Haggerty added.
Some lending institutions are also implementing new strategies to help homebuyers who need financing compete with the all-cash buyers, Lewis said.
“Some are actually implementing programs where they will purchase the home for cash and then refinance it for the buyer once it’s closed,” she said. “That’s pretty creative.”
Beyond the housing market, the Fed’s interest rate increases have made consumers more sensitive to pricing. Local businesses are reporting to the St. Louis Fed that they have less leeway to raise prices, Jefferson said.
“Consumers are being really careful not to spend more than what they can afford,” he said. “We’re seeing more demand shift down into the lower end of the market, and people being careful to look out discounts and deals wherever possible.”
The Fed’s overall goal with these increases is to stabilize prices so that consumers feel less anxiety over the cost of goods, Jefferson said. He added there will likely be more rate increases in the future in efforts to get inflation to come down to the central bank’s 2% target.