Fed hikes interest rates: What will happen to your monthly bills?
When the Federal Reserve raises interest rates, as they did today with a quarter-point increase from 1.25 to 1.5 percent, we're all going to feel it. This is the fifth time interest rates have increased since the Fed cut rates to almost zero during the recession of 2008.
The Fed, or The Federal Reserve Bank, represents the United States' central banking system, created by Congress more than 100 years ago to provide the country with a safer and more stable financial system, increased interest rates today as a positive indicator that our U.S. economy looks healthy. As the Federal Reserve explained in their FOMC statement issued on December 13, 2017, "The labor market has continued to strengthen and… economic activity has been rising at a solid rate. Averaging through hurricane-related fluctuations, job gains have been solid. The unemployment rate declined further." Household spending, says the Fed, has been increasing moderately. Recent business investment growth has also picked up.
The Federal Reserve raised interest rates: What happens next?
The federal funds rate is set by the Fed and used as a benchmark for consumer interest rates. Financial institutions base lending rates on the prime rate based on the Fed rate. When the Fed rate increases, the prime rate increases too, and consumer rate increases could follow. Historically, the Federal Reserve increases interest rates to fight inflation by making money scarcer. This time, economists say the Fed is hoping to get the interest rate back to its long-term neutral position. Before the recession, it was closer to 3 to 3.5 percent.
This is the third time the Federal Reserve has raised interest rates in 2017, with the potential to impact:
Auto loans – The Federal interest rate hike primarily affects short-term interest rates. But it can also impact medium-term fixed loans that include car loans. Those who plan on buying a car in the new year may be better off securing a lower-rate car loan now — before rates increase three more times, as forecasted for 2018.
Credit card rates – Due to the rate hike, loans may become more expensive, and credit card interest may also increase. Variable credit card interest rates are based on the prime rate. Now, financial analysts recommend that consumers place a high priority on paying down credit card debt. (Or switching to a 0 percent interest card, if possible.)
Job market – Raising the federal funds rate can slow the economy and lead to fewer hires.
Mortgage rates – Thankfully, compared to the other ripples in the pond, effects on mortgage rates are expected to be minimal. Home loans with 15- to 30-year loan terms don't fall into the short-term category. New borrowers hoping to buy may be slightly affected by fluctuations in mortgage rates and can get a rate quote by talking to a lender.
Talk to a loan officer about mortgage rates
The rate hike means mortgage rates could slowly creep up. This is especially important for those who currently have adjustable-rate mortgages or home equity lines of credit. To get ahead of the rise, talk to a loan officer as soon as possible about your options. New buyers may be able to see monthly savings by locking in a loan with a lower interest rate, before more hikes occur in 2018. This is often reflected in a lower monthly mortgage payment. Homeowners with adjustable-rate mortgages, the type of mortgage most likely to be affected by the Fed rate hike, may benefit from a mortgage refinance.**
