How the Fed's Rate Hike Affects You
The Federal Reserve announced its decision to increase interest rates by a quarter of a point on Wednesday, putting an end to weeks of speculation. But how does this affect you as an investor and as a consumer? Here’s what experts say we can expect.
Ending weeks of speculation on Wednesday, the Federal Reserve raised interest rates by a quarter of a point.
The Fed’s decision comes after the economy has regained some strength that was taken away during the Great Recession. It lowered rates during the recession to create economic growth.
With the economy and the job market on the upswing, this new increase signals that the Fed no longer thinks the lowered rates are necessary to stimulate growth. The rate hike is the third since the recession and the second in 3 months.
The hike also signals the possibility of additional increases to the benchmark interest rate in future months.
But how does this affect you as an investor and as a consumer? After scouring various news outlets for insights, this is what experts say we can expect.
It’s difficult to know, the Associated Press reports, whether the hike will affect mortgage rates. The AP notes that mortgage rates are not typically tied to the Fed’s increases. However, the average 30-year, fixed-rate mortgage has hit 4.2%, compared to last year’s 3.65%, the AP says. That rate increase tells us that the markets may have already factored in Wednesday’s rate hike.
According to USA Today, whereas mortgage rates may be spared from the effects of the Fed’s rate hike, the same cannot be said for auto loans. Whatever increase we see in the benchmark interest rate will also show up in auto loans, USA Today says. However, the increases may be not matter much to consumers—there should only be a $10 or so increase per monthly payment for a typical 5-year loan.
The US dollar is still the world’s preferred currency for borrowing, and if the interest rate goes up, that could prompt investors to sink money into the US. This would elevate the value of the dollar against other currencies and increase the cost of borrowing, the Guardian reports. Rate increases typically spell out bad news for current holders. As rates improve, higher-paying alternative bonds become available. This makes your less-valuable bonds harder to sell.
The AP notes that we might see an increase in returns from CDs and money market accounts, though it will likely take a while. Banks, the news agency points out, are in the business of making money. While they’ll be quick to charge borrowers more money to receive capital, they’ll be slower to offer better rates to savers.
Credit cards will take the first hit under the rate hike, USA Today reports. Consumers can expect rates to rise with the Fed’s increase—the AP puts the increase on a timeline of about 60 days. Currently, CreditCards.com puts the average credit card interest rate at 15.07%. Home equity lines of credit stand at about 5.21%, according to Bankrate. “It’s a great time to be shopping around if you have good credit and (can) lock in zero-percent introductory and balance-transfer offers,” said Greg McBridge, Bankrate’s chief financial analyst, in the AP’s report.