First, U.S. tariffs on imported goods could have the effect of raising the prices you pay.What would this mean to the overall cost of goods and services? It’s difficult to say for sure, but Alex Capri, a senior fellow at the National University of Singapore Business School, estimated that 2018 consumer price inflation would be 1.5% higher than expected if a retaliatory trade war were to materialize between the U.S. and China.
The less obvious result of a trade war could be higher interest rates on credit cards, auto loans, mortgages, and more.Specifically, after its March 2018 meeting, the Fed projected 1.9% inflation this year, 2% in 2019, and 2.1% in 2020 — all right on target. The Fed already expects to do another seven or eight quarter-point rate hikes by the end of 2020 based on these current inflation projections.
If inflation were to spike, the Fed could get even more aggressive than it already plans to, which could have major effects on the price consumers pay to borrow money
When the Federal Reserve raises the benchmark federal funds rate, it doesn’t simply cause all consumer interest rates to immediately rise. Rather, it affects different types of borrowing in different ways. Here’s a quick rundown of common consumer interest rates and how Fed rate hikes affect each one.
- Credit card interest rates are directly tied to the federal funds rate. In other words, if the Fed raises rates by 2 percentage points over the next few years, you can expect a 16.49% credit card APR to rise to 18.49%. If inflation heats up, and the Fed boosts rates by 4 percentage points, you’re looking at an APR of 20.49%
- Home equity lines of credit (HELOCs) are also directly tied to Fed rate hikes, so they would go up immediately after the Fed decided to hike rates to combat inflation.
- Auto loans and mortgages aren’t directly tied to the federal funds rate, although they do tend to move in the same direction over time. So, it’s fair to say that a likely effect of trade war inflation would be higher rates on auto loans and mortgages, but it isn’t likely to be a perfect correlation.
