One of the primary ways that the Federal Reserve — America’s central bank — can influence the broader economy is through interest rates, which is why you’ll see so much news speculating when the next Fed rate hike is or isn’t supposed to happen.
Fortunately, because changes in monetary policy can matter so much to financial decisions being made by everyone from the largest investment banks to someone considering getting a credit card, the members of the Federal Open Market Committee go out of their way to be as transparent about their decision-making process as possible. So, although nothing is certain until it’s announced, predicting when the next rate hike can be helpful. Here’s a look at what to expect from the FOMC during the second half of 2018.
What to Expect From the Fed for the Rest of 2018
The FOMC keeps a close eye on things like the inflation rate, the unemployment rate and the stock market to get a sense of where the economy is, meeting eight times a year to discuss how the different economic indicators can be interpreted. When there’s a relative consensus about those factors indicating a strong economy — as they do at the moment — the FOMC will raise interest rates to pump the brakes on economic growth before things get out of hand.
The last rate hike in June 2018 took rates from 1.75 percent to 2 percent, and the members of the committee have generally demonstrated support for two more rate hikes before the end of the year.
Generally speaking, the lower interest rates are, the easier it is for the economy to grow. But when the economy grows too fast, it can overheat and create the sort of bubbles and subsequent crashes that can undermine long-term growth — like the 2008 financial crisis. When times are good, the FOMC will typically start inching up interest rates to try and keep growth at a steady, sustainable pace. It doesn’t always work as it’s never 100 percent certain how much economic growth is “too much” until it’s too late, but that doesn’t stop the FOMC from trying.
Because of the generally murky nature of what they’re working on, members of the committee and its chairman Jerome Powell make an effort to hint at what their interpretation of different economic factors are in public comments prior to making any real policy changes.
What Is the Federal Funds Rate?
When people discuss the Federal Reserve raising or lowering interest rates, they are almost always refering to the “federal funds rate,” which, for how important it is to everyone’s lives, remains the source of considerable mystery for much of the American public. The federal funds rate is actually just what banks charge each other for overnight loans.
Banks have a “capital requirement,” which is a certain percentage of their total assets that they have to keep with the Federal Reserve to ensure they have enough cash on hand for an emergency. But in the course of a normal day’s business, banks will frequently find themselves above or below the required level. In that case, the banks with a deficit will simply borrow money from those with a surplus, sometimes just overnight.
Note that the FOMC doesn’t actually set the federal funds rate — it just sets the target range of rates that the Fed attempts to achieve through various “open market” practices.
The individual banks can choose to lend — or borrow — at whatever the best rate they can get is, and the federal funds rate is just the average of those loans. But the Federal Reserve can indirectly influence those banks by buying and selling securities — usually government bonds — in order to increase or decrease the total money supply. When there’s less money on the market, it’s harder to find a loan when you need it and borrowers can charge more, and vice versa.
That’s why the funds rate is usually stated as a target range. Although the Fed can exert enough influence to ensure that the rate falls within a relatively narrow range, it might not always be able to be precise enough to hit the nail right on the head.
How Will a Fed Rate Hike Affect You?
Although you are almost certainly not going to be making use of the federal funds rate anytime soon regardless of the state of your “capital reserves,” that core interest rate has a ripple effect across the entire country.
More than anything else, the federal funds rate is important because it serves as a benchmark for virtually every other kind of loan banks are making. Although the rate at which they lend money is entirely up to individual banks, those banks typically set their prime rates — the rate banks give their most creditworthy customers — using the federal funds rate as the benchmark.
That means that when the Fed raises rates, it makes it more expensive to borrow money in any form across the entire economy. That said, it’s an indirect relationship, and there are plenty of other factors that will influence rates for any given person, meaning how your personal finances are affected can vary.
Savings Account Rates
Unfortunately, although banks are pretty quick to charge you more interest on loans, they aren’t nearly as fast about inching up the rates they’re paying out on their savings accounts. The average savings account interest rate at the end of 2016 was just a 0.06% APY, and after five separate rate hikes that raised the federal funds rate from 0.5-0.75 percent to 1.75-2 percent, that rate had climbed just one-hundredth of a percent to 0.07% APY as of June 25, 2018.
Student Loan Rates
For anyone with an existing federal or fixed-rate student loan, your interest rate is locked in and won’t change with the federal funds rate. But if you have a variable-rate loan from a private lender, you should expect your interest rate to rise again if the Fed keeps hiking rates.
Credit Card Rates
Odds are good that your credit card comes with a variable interest rate, meaning that your APR is likely to increase to reflect changes in the federal funds rate. If the issuing bank for your credit card raises its prime rate, you can probably expect the interest rate on your credit card to rise as well.
If you already have a fixed-rate mortgage, you locked in your rate ahead of time for precisely a moment like this. If you opted for a variable-rate mortgage, though, your decision might be costing you money right now and will again before the end of the year.
If you’re shopping for a mortgage, the odds are good that rates will be on the rise. Although the mortgage rate is typically tied to factors like the returns on 10-year Treasury notes, the returns on 10-year Treasury notes are influenced by the federal funds rate, so the ripple effect will typically make its way to the mortgage market as well.
Find Out: How to Get the Best Mortgage Rate
Auto Loan Rates
Like any other way of borrowing money, the costs of auto loans could go up along with the federal funds rate. Once again, check your bank’s prime rates to be sure they’ve made a change to reflect the new Fed policy, and if they have increased, expect a slight increase in rates on newly originated car loans as well.
Click to read more about why you should care about interest rates.
More on Banking and Interest Rates