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With Federal Reserve officials gathering for a policy meeting this week, speculation as to whether the central bank will finally raise interest rates hasn’t let up. In the scope of the U.S. economy, tinkering with the federal funds rate is a big deal — the higher it goes, the more expensive borrowing becomes.
That’s because many lending institutions look to the fed funds rate to determine where they should set their interest rates. To try to stabilize the economy in the wake of the financial crisis in 2008, the Fed dropped the rate to rock-bottom lows of 0% to 0.25%. Now that the economy has essentially rebounded, experts have spent the last year trying to anticipate when the Fed might jack up the rate again.
If you’ve stuck with us this long, you’re probably only wondering one thing: What would a rate hike mean for my wallet? We spoke with experts to get an idea of what everyday folks can expect.
Mortgage rates
Selma Hepp, chief economist for Trulia, says a rate hike will eventually lead to mortgage rate increases but rates are still so low today that any change won’t necessarily spell doom for homebuyers. To folks still worrying, she offers this comforting dose of reality: “Keep in mind that the 30-year fixed rate mortgage is at 3.7% right now. If the rates reach 4.5% by the end of next year, that would be an increase of $100 on a mortgage payment on a $250,000 mortgage loan amount.”
If you have an adjustable rate mortgage, there isn’t much to worry about, predicts Keith Gumbinger of HSH.com. That’s because the Fed only directly controls the short-term rate used among banks. Mortgage rates are based on Treasury-bond yields, which may or may not rise along with Fed funds. “Short-term interest rates and long-term mortgage rates have little direct relationship with one another,” Gumbinger writes. “As such, this shouldn't give either the Fed or a consumer pause with regards to a rate change.”
The bottom line: If you’re in the market for a new home, don’t let a rise in rates spook you. It’s always difficult to determine the perfect time to lock in a mortgage rate. Focus instead on whether you’re financially prepared to buy a home.
Credit and savings
Some may not call this a silver lining, but the reality is that interest rates are already so high on credit cards today (nearly 15%) that a rate increase probably won’t make that much of an impact. It will still be painfully expensive to carry debt on credit cards — just slightly more so.
“Most credit cards have a variable interest rate and if the [fed funds rate] moves up, then you’ll start seeing that reflected on your credit card debt right away,” says Nick Clements, a former banking executive and founder of personal finance education site MagnifyMoney.
On the flip side, higher interest rates are generally good news for savers. Yields on basic bank savings accounts and certificates of deposit are so depressingly low today that it’s unlikely a fed rate hike will make all that much of a difference in your bank balance. “I wouldn’t be expecting any dramatic or rapid increase on savings rates,” Clements says. “Banks know the minute they start raising rates like that, there are going to be huge costs, so they tend to go pretty slowly and move in herds.”
If you have taken out a home equity line of credit are concerned your rate will go up with a Fed hike, you may be worrying over nothing. Gumbinger says you can expect your rate to only raise “a tad,” much in the same way as credit card rates.
Car loans
Greg McBride, chief financial analyst for Bankrate.com, says any impact on auto loan rates will be negligible if the Fed raises rates. “Nobody is downsizing from an SUV to a compact car based on rising rates,” he says. “For somebody looking at a $25,000 car loan, even a quarter-point rate hike is only a difference of around $3 a month. (The average rate on a 60-month auto loan today is 4.28%.)
The best thing any car buyer can do to keep costs low is to shop around for competitive financing options and negotiate on the price of the car. “What the Fed is doing with short-term interest rates is small potatoes,” McBride says.
Investments
When interest rates rise, bonds tend to become less valuable. But investors should keep an eye on their long-term investment strategy rather than fretting over an imminent rate hike, says Avani Ramnani, director of financial planning and wealth management for Francis Financial. Low-risk assets like bonds have a purpose in a portfolio, providing a much-needed counterweight to the higher risk of investing in stocks. If you’ve been working with an investment advisor, their priority (and yours) should be your personal investment goals and your tolerance for risk.
“You may shift some of your bond allocations but you’re not completely getting out of bonds,” Ramnani says. “When the bond market does turn around — and it will at some point — the traditional bonds [like U.S. treasuries] are the ones that will make the most money because that’s going to be the safe bond to be in.”
If you’re interested in learning more about how the Federal Reserve works, check out “Understanding the Federal Reserve,” a free online course offered by edX, a nonprofit education platform in partnership with New York Institute of Finance.
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Mandi Woodruff is a reporter for Yahoo Finance and host of the weekly podcast Brown Ambition. Follow her on Tumblr or Facebook.
