Will the Fed’s Latest Rate Increase Affect You?
March 20, 2017
Marcus Winbush, CFP® — CEO, True North Capital Alliance
The Fed’s March 15th increase of the federal funds rate was much anticipated by most analysts. As a result, the markets were well prepared for the modest increase of one-quarter percent, taking the federal funds rate to a range of 0.75 to 1 percent. This is only the third increase since the federal funds rate was reduced to near zero during the Great Recession, which began in 2008.
A Good News Rate Increase
While consumers do not look forward to Fed decisions that increase the cost of borrowing, there is clearly good news in the recent announcement. Quite simply, the good news, according to Fed Chair Janet Yellen, is this: “The U.S. economy is doing well.” In her March 15th press conference, Yellen expressed the Fed’s “confidence in the robustness of the economy and its resilience to shocks.”
Since the worst of the financial crisis, the economy has added “around 16 million jobs,” the unemployment rate dropped to 4.7 percent in February, and inflation is moving up toward the Fed’s 2 percent target. Yellen conceded that “people with less skill and education and certain sectors of the economy” still face challenges in the labor market. However, many people are expressing optimism about their job market prospects, and consumer sentiment has improved. Chair Yellen believes that “people can feel good about the economic outlook.”
How Does the Feds’ Rate Move Affect You?
This interest rate move will have ripple effects that increase the cost of borrowing over time. The federal funds rate, also known as the “overnight rate,” is the rate banks pay to borrow money from Federal Reserve banks. The federal funds rate is directly correlated with the prime interest rate that banks charge their most creditworthy customers. As the federal funds rate goes, so goes the prime interest rate and many forms of interest that consumers pay for essentials and lifestyle items.
Thus, you can expect to see changes such as the following over time.
- Higher Mortgage Interest: According to Bankrate.com, mortgage rates for 30-year mortgages increased from 4.21 percent to 4.31 percent last week. this was the second increase in two weeks. The outlook is for mortgage rates to continue rising gradually this year. Likewise, interest rates for home equity lines of credit and adjustable rate mortgages will gradually rise as the Fed continues to adjust the federal funds rate upward.
- Higher APR on Credit Cards: Most credit cards carry a variable interest rate, which is closely tied to the prime interest rate. Thus, you can expect interest on credit card accounts to move upward commensurate with the Fed’s rate increase.
The surest way to avoid being hit by rising credit card interest is to pay the account balance each month. If this is a challenge, consider using the snowball debt payoff method described in my recent post to eliminate credit card debt.
- Little Change in Interest Paid on Savings: Savers are certainly hopeful to see higher interest paid on savings. Currently, the average savings account pays only about .10 percent with some online savings accounts paying around 1.0 percent and slightly higher. Unfortunately, the amount of interest that banks pay on saving accounts is not likely to increase quickly in response to the Feds’ rate hike.
The Fed projects a federal funds rate of 1.4 percent by the end of this year and 2.1 percent next year. That means we should expect one or two more rate increases this year. The timing and amount of future rate increases will continue to be gradual and dependent on the continued strength of the economy.
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