The long-awaited interest rate hike by the Federal Reserve was finally announced today. The Fed announced that it would raise rates by a quarter of a percentage point, up from close to zero. While the increase was small, the move was significant.
The last interest rate hike came in mid-2006. The Fed’s decision to lower rates and keep them close to zero for so long was unprecedented. But it made sense. Since 2007, when the country entered a financial crisis, the Fed kept moving rates lower in the hopes of boosting economic activity. The idea was the low rates would allow consumers and businesses to borrow and spend more.
Now, however, the economy looks stronger. Unemployment is approaching 5 percent—very close to the point when inflationary pressure typically starts to kick in. While there really isn’t any inflation yet, the small increase in interest rates could help to ward it off.
So how will the interest rate hike today affect you?
Mortgages. Rates are going to go up. Most economists recently polled expect the conventional 30-year mortgage rate to rise in 2016. If you are already locked into a 30-year fixed mortgage, you have nothing to worry about. Most adjustable mortgage rates, however, are reset once per year. So if rates rise a number of times before your next reset, you could end up paying more. An alternative would be to consider refinancing to a fixed rate loan before long-term rates increase significantly.
Credit cards. Similar to adjustable rate mortgages, credit card rates are likely to rise almost immediately. That, in turn, will mean a higher annual percentage rate (APR) for many variable-rate credit card borrowers—the predominant type of credit card agreement. And unlike other credit card rate increases, a 45-day notice from the credit card issuer isn’t required.
However, some credit card rates have a ceiling. These credit card borrowers are already paying more than the prime rate plus additional percentage points, so a small increase isn’t likely to affect the APR for these credit card borrowers.
Here’s a tip: If you want to protect yourself against higher credit card rates, you could get a 0 percent balance-transfer card and move your outstanding balance there. That could give you up to 18 months to pay off your balance.
Auto loans. As rates increase, the cost of borrowing to buy a new car rises. The result of a rate increase is that you may decide to put that purchase off for now. The rate increase today was small, but if future increases are on their way, car loans stand to become much more expensive. But there is some good news. If fewer people are buying cars, inventory levels could climb, which, in turn, could lead to the price of new cars falling.
Savings. Don’t expect to start seeing 1-year CDs offering a 3 percent return anytime soon. The best rates (usually found at online banks) will barely budge, unless there are further Fed increases in the coming months. Banks don’t immediately pass on higher savings rates to their depositors.
Stocks. While it’s never wise to make short-term stock market forecasts (and one year certainly counts as short term for prudent investors) stocks typically do well in the year following an initial Federal Reserve rate hike, according to data crunched by Fidelity. Intuitively, this makes sense: Central bankers typically won’t raise rates unless the economy is deemed healthy enough to tolerate an action that could slow the economy.
But keep in mind that there have been times when the Fed raised rates and stocks fell in the following 12 months.
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