For the third time this year, Janet Yellen and her Federal Open Market Committee have decided to raise the interest rates for the Federal Reserve another quarter of a point after their final meeting of the year on Dec. 13.
The increase moves federal funds rate to a benchmark range of 1.25 percent to 1.50 percent, further underscoring the central bank’s resounding confidence in the ever-growing strength of the economy.
“Averaging through hurricane-related fluctuations, job gains have been solid, and the unemployment rate declined further,” the Fed said in a statement, discussing the growth in labor and economic activity.
With Yellen’s recent announcement of resignation from her role as Chair of the Fed — as well as President Trump’s latest announcement of Jerome Powell as her successor — many factors are at play that could affect the economic upturn in the next few months. Read on to find out how the Fed’s next interest rate change could impact your budget.
How the Fed Rate Hike Will Affect Your Finances
The Fed rate hike impacts everything from mortgages to credit cards. Expect to see various changes in your interest rates now into 2018. Here are six ways the Fed rate hike will impact your financial life:
1. Mortgage Interest Rates Might Rise
The lasting impact of a Fed rate hike on mortgage interest rates remains unclear. Potentially, it could raise rates on the long-term bonds used to set mortgage rates. Yet, 10-year Treasury bonds are also influenced by inflation expectations and the worldwide economic outlook. In the short term, adjustable-rate mortgages and home equity lines of credit would be more sensitive to a Fed rate hike.
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.
When the Fed rate hike was announced in June 2017, rates for a conventional 30-year fixed rate mortgage ended the week at 3.91 percent, and despite a brief summer spike, they dropped back down to the exact same percentage for the week ending Oct. 12, according to Freddie Mac.
2. Auto Loan Interest Rates Could Trend Higher
A small rise in the federal funds rate shouldn’t affect car buyers too much. U.S. automakers realized a record-breaking 2016, as automakers sold 17.6 million cars and light trucks. This marked a 0.40 percent increase in sales from the record set in 2015.
If interest rates continue to rise, auto loan rates will likely follow suit. However, recent Fed interest rate hikes have been small, so it is unlikely consumers would be impacted in any significant fashion in the short term.
Dealers want to keep new cars moving, so they’re motivated to continue offering incentives. In the long term, multiple Federal Reserve interest rate hikes could eventually take a noticeable toll, so if you’re thinking of getting a new car in the next few years, keep a close watch on the interest rate forecast.
3. Fed’s Decision Won’t Raise Interest Rates on Bank Deposit Accounts
The Fed rate hike might sound like a great opportunity to collect higher interest payments on deposit accounts, but it doesn’t work that way. Even with the three previous interest Fed rate increases from the Federal Reserve, you probably won’t see higher interest rates on your checking and savings accounts. The average savings account has a 0.06 percentage annual yield, as of Oct. 10, which is the same as it was June 12, two days before the most recent Fed rate hike, according to the FDIC.
Of course, there’s always an exception to the rule. In December 2015, shortly after the first Fed rate hike, JPMorgan Chase & Co. announced an increase in deposit rates for select customers, but this was not the industry standard.
In general, when the Fed raises interest rates, savings rates rise at a slower rate than borrowing rates. Of course, 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 will follow. Don’t expect a huge spike, however, as recent legislation prevents lenders from quickly hiking the rate on existing balances in most cases. If rates skyrocketed overnight, consumer spending would plummet — 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
If you’re worried about another potential hike in the Fed rate because you’re buried in student debt, don’t panic: Your monthly payment might not rise at all. Federal student loan rates — Federal Perkins Loans, Direct Subsidized and Unsubsidized Loans, Direct Plus Loans and Stafford Loans — 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 2006-2007 school 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, so if you have private loans, these 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. Another Fed rate hike won’t drastically raise your variable student loan payments, but if the Fed continues to increase rates, your wallet could start to feel a bit lighter.
6. Retirement Plans Could Take a Tumble With a Federal Rate Hike
Higher interest rates could have a negative effect on your retirement account — at least in the short term. Many factors play into the extent of the impact, including portfolio diversification and target retirement date.
Market volatility is common after a Fed rate hike, 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.
Certain types of bonds, such as high-quality corporate bonds and U.S. Treasury bonds, are more sensitive to rising interest rates than other investments, according to financial services company TIAA. On the other hand, the company notes that equity markets have historically increased after rate increases, as it signals economic growth.
If it’s been some time since you reviewed your portfolio, you should take some time to analyze your asset allocation. Consider meeting with a financial advisor to go over your plan if this isn’t your area of expertise.
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Depending on what type of loan and deposit products you have now, the Fed rate hike might have more impact on your finances than it has in the past. With new rates and the new year just around the corner, it might be time to reevaluate your finances and optimize them for a richer life in 2018.