The Federal Open Market Committee announced Wednesday to increase interest rates by a quarter-point, putting funds rate at a target range of 1.50 to 1.75 percent. This marks the sixth time that the Fed has increased interest rates since 2015 — three of which times were in 2017.
The decision comes as no surprise after newly confirmed chairman of the Federal Reserve Jerome Powell alluded to plans for the Fed’s rate hike during his testimony before the U.S. House of Representatives Financial Services Committee in February.
Under the direction of former Federal Reserve Chairman Janet Yellen, the federal funds rate sat at a target range of 1.25 percent to 1.50 percent. Keep reading to find out how another Fed rate increase might affect your finances.
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 for the foreseeable future.
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. 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 interest 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.
The previous Fed rate hike increased rates for a conventional 30-year fixed rate mortgage from 3.93 percent for the week-ending Dec.14, 2017 to 4.4 percent on the week-ending Feb. 22, 2018, according to Freddie Mac.
2. 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.
Rates for personal loans have already risen from 9.45 percent in the fourth quarter of 2016 to 10.57 percent in the fourth quarter of 2017, according to the Fed. Additional rate hikes will likely cause this number to climb even higher.
3. Fed’s Decision Won’t Raise Interest Rates on Bank Deposit Accounts
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.
The average savings account has a 0.07 annual percentage yield as of March 21, 2018, which is just slightly higher than the 0.06 annual percentage yield on Dec. 11, 2017, two days before the previous rate hike, 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 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. Consumer spending would 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, Direct Plus Loans and Stafford 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 2006-2007 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.
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.
Certain types of bonds, such as high-quality corporate bonds and U.S. Treasury bonds, are more sensitive to rising Federal Reserve 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.
Depending on how long it’s 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 have more impact on your finances than it has in the past. If so, it might be time to reevaluate your finances and optimize them in a manner that suits your current needs.
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