The Fed Raises Rates Again: Here’s What It Means for Your Wallet

Learn six ways a Fed rate shift could impact you.

The Federal Open Market Committee announced on Thursday, Dec. 19, that it would increase interest rates by a quarter point, putting the federal funds rate at a target range of 2.25 to 2.5 percent. That’s the fourth rate hike of 2018, continuing the present fiscal policy of trying to slow economic growth to a more measured pace.

Chairman of the Federal Reserve Jerome Powell has been transparent about his bullish opinions regarding the trajectory of the U.S. economy and his intent to keep increasing interest rates as a result. Since breaking from seven straight years of near-zero rates during the Great Recession, the FOMC has now raised rates nine times — by a quarter-percent on each occasion — since December 2015.

Heading into this meeting, there was some speculation as to whether or not the rate hike that had been promised all year would materialize based on recent economic trends and pressure from President Donald Trump, but the FOMC has stuck with the plan for four hikes in 2018 while updating plans for 2019 from three increases to just two.

Keep reading to find out how another Fed rate increase might affect your finances.

How the Fed Rate Hike Will Affect You

A hike in the federal funds rate indirectly impacts everything from mortgages to credit cards, so expect to see various changes in your interest rates for the foreseeable future. Although these changes are frequently marginal, you should be careful to make sure you understand just how your personal finances might be affected.

Here are six ways a Fed rate increase could impact your wallet:

1. Mortgage Interest Rates Might Rise

The lasting impact of a Fed rate increase on mortgage interest rates remains unclear as there are a number of other economic factors that play into the whole picture, but a rate hike definitely provides upward pressure on mortgage rates.

Potentially, it could raise rates on the long-term bonds typically used to set mortgage rates, but the relationship between the interest rates for long-term Treasury notes is less direct than with short-term Treasury bills. The 10-year Treasury notes are also influenced by inflation expectations and the worldwide economic outlook, so other factors might ultimately prove more important than the federal funds rate. In the short term, adjustable-rate mortgages and home equity lines of credit would be more sensitive to a Fed interest rate hike because their variable rate structure is intended to increase along with the market.

So, although it’s impossible to say exactly how another rate hike will impact mortgage rates, it might be best to eliminate uncertainty. If you’re seeking a new home mortgage or considering refinancing an existing mortgage in the near future, you might want to lock in a fixed-rate mortgage loan sooner rather than later.

The previous Fed rate hike increased rates for a conventional 30-year fixed-rate mortgage from 4.57 percent at the start of June 2018 to 4.87 percent as of November 2018, according to Freddie Mac.

Find Out: How to Get a Mortgage for $1M or More

2. Auto Loan Interest Rates Could Trend Higher

A small rise in the federal funds rate shouldn’t affect car buyers too much, but if interest rates continue to rise, auto loan rates will likely follow suit. Recent Fed interest rate hikes have been small, however, so it is unlikely consumers would be impacted in any significant fashion in the short term. Keep a close watch on the interest rate forecast if you’re thinking of getting a new car in the next few years, though.

3. Bank Deposit Account Interest Rates Won’t Rise

The Fed rate increase might sound like a great opportunity to collect higher interest payments on deposit accounts, but it doesn’t work that way. Even with the four previous rate increases from the Federal Reserve, you probably didn’t see much higher interest rates on your checking and savings accounts.

But there are indications that banks are starting to reflect higher interest rates in their savings account yields. The average national rate was 0.06% APY at the start of 2018, the same level it was at the start of 2017 and 2016, but that average rate is up to 0.09% APY as of Dec. 17, 2018, a 50 percent gain in just a year, according to the FDIC.

Generally speaking, when the Fed raises interest rates, savings rates rise at a slower rate than borrowing rates. If rates continue to increase, banks will need to raise interest rates on deposit accounts to remain competitive. Shop around to ensure your bank is offering you a fair rate.

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4. Credit Card Interest Rates Should Not Spike

Credit card interest rates are variable and somewhat sensitive to hikes in the federal funds rate. As interest rates and consumer confidence go up, your credit card rate can follow.

Don’t expect huge spikes at random, however, as legislation prevents lenders from quickly hiking the rate on existing balances in most cases. Consumer spending could plummet if rates skyrocketed overnight — the exact opposite of what the Fed wants to happen.

Under the terms of the Credit CARD Act of 2009, issuers are typically barred from raising rates on existing balances unless you’ve missed two consecutive payments. They’re also required to provide 45 days advance notice prior to increasing your interest rate on new purchases, allowing you time to cancel the account if you so desire.

Unfortunately, credit cards with variable interest rates are an exception to this rule, so if your card does not have a fixed rate, you might see an immediate increase.

5. Student Loan Rates Won’t Skyrocket

Even with another Fed rate increase, don’t panic if you’re buried in student debt. Your monthly payment might not rise at all. For federal student loans — Federal Perkins Loans, Direct Subsidized and Unsubsidized Loans, and Direct Plus Loans — rates are fixed, so the payment will remain the same until you’ve paid off your loans. This hasn’t always been the case, though, so if you have a Stafford Loan that originated prior to the 2006-07 academic year, read the fine print to find out if it’s fixed or variable.

Federal loans aren’t the only way to pay for school though — if you have private loans, they could be attached to variable terms. You might consider your refinancing options for any variable student loans to see if a fixed rate will save you money in the long term.

6. Retirement Plans Could Take a Tumble With a Federal Rate Hike

Market volatility is common after a Fed rate increase, which can at least temporarily cause the value of stocks in your retirement portfolio to decline. Even fixed-income investments can take a hit, but some bonds react differently than others. Many factors play into the extent of the impact, including portfolio diversification and target retirement date.

Depending on how long it has been since you reviewed your portfolio, you might want to take some time to analyze your asset allocation. Consider meeting with a financial advisor to review your retirement plan if this isn’t your area of expertise.

Depending on what type of loan and deposit products you have now, the Fed rate increase might more significantly impact your finances than it has in the past. If so, it might be time to re-evaluate your finances and optimize them in a manner that suits your current needs.

Click to read why more than half of Americans will retire broke.

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Joel Anderson contributed to the reporting for this article.