The Federal Reserve on Wednesday announced it voted 9-to-1 to raise its benchmark rate known as the federal-funds rate by 0.25% to a range of 0.75% to 1%. The hike directly increases the cost of borrowing money.
The Fed and Janet Yellen raised the key U.S. interest rate for the first time in 2017. The central banking system announced it only has two more rate increases planned for 2017, and the financial markets reacted positively to that news.
Since the federal-funds rate hike was officially announced, the S&P 500 moved up 0.84% to 2385. The Dow Jones Industrial Average gained 0.54% and moved up to 20,950. The NASDAQ gained 0.74% to 5,900.
Mortgage rates don’t automatically move with a rate hike, but they most often do. Most people have fixed-rate mortgages instead of a variable rate, so those rates are locked in. But people that have a variable rate mortgage or are looking to buy a home will most likely have to pay a higher rate. According to Freddie Mac,the average 30-year fixed-rate mortgage was 4.21% last week.
Private student loans that are not locked in are also likely to rise due to the rate increase. Federal student loan rates are locked in.
The rate hike will likely do little to impact money made from added interest accumulated via savings accounts. Credit card rates will rise in lock step along with the Fed rate increase.
Consumers tend to feel positive impacts long after rate hikes, but are impacted negatively in the short term.
The unemployment rate fell to 4.7% in Feb., a number the Fed sees as a good sign as it works towards maximizing employment and moderating inflation. Inflation is currently near the 2% annual pace that the Fed regards as optimal.
"The simple message is the economy is doing well," Yellen said in a press conference Wednesday in response to a question about what the Fed wanted to communicate to the American people.
The Fed raised rates only once this past year, in Dec. 2016. Previously, the key interest rate was raised in Dec. 2015 for the first time since the financial crisis.
“Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made” Yellen said at a press conference after the Dec. 2016 hikes.
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