The Federal Reserve raised interest rates on Wednesday ending an unprecedented seven-year period of near-zero rates that began in the aftermath of the financial crisis.
The Fed’s decision was widely expected and it was seen as a vote of confidence in the U.S. economy. The Fed has said repeatedly in recent months that it believes the economy is strong enough to withstand higher borrowing costs.
Still the rate hike is likely to have an immediate effect on American consumers and businesses who will see higher interest costs on loans and credit cards.
Here’s a look at how the Fed’s decision could affect you:
Mortgage rates are already on the rise
The average rate for a 30-year fixed-rate mortgage has climbed to 3.75% from 3.65% last week and it’s expected to go higher in the coming weeks according to Freddie Mac.
The yield on the 10-year Treasury note which influences mortgage rates spiked Wednesday after the Fed announcement.
Refinancing activity has already begun to dry up as rates have risen in recent months. The Mortgage Bankers Association’s index of mortgage applications fell last week to the lowest level since early October.
Higher rates will make it more expensive to buy a home
The monthly payment on a $200000 mortgage will rise by about $16 a month if rates increase by a quarter of a percentage point according to Bankrate.com. That’s not a huge increase but it could make a difference for buyers on the margins.
If you’re in the market for a new home you may want to lock in a low rate now. Mortgage rates are still near historic lows and they’re not expected to rise significantly in the next year or two.
Auto loan rates are still low
The average interest rate on a 48-month new-car loan is currently 4.21% according to Bankrate. That’s up slightly from last year but it’s still low by historical standards.
The Fed’s interest rate hike is not expected to have a major impact on auto loan rates in the near term. But if rates continue to rise as expected auto loan rates will eventually go up as well.
Credit card rates will climb
The average interest rate on a credit card is about 15% according to Bankrate. That rate is not directly influenced by the Fed’s interest rate.
But as the Fed’s rate rises so does the “prime rate” which is the rate banks charge their best customers. The prime rate is used as a benchmark for a variety of loans including credit cards.
So when the prime rate goes up credit card rates will likely follow.
The savings account interest rate is going up too
The average interest rate on a savings account is currently 0.06% according to Bankrate. That’s not much but it’s better than nothing.
The Fed’s interest rate hike will cause the Savings Account Interest rate to go up as well. The increase is not likely to be significant but it will be more than the 0.01% rate that some banks are currently offering.
The bottom line
The Fed’s interest rate hike is not likely to have a major impact on most Americans in the near term. But it is a sign that the economy is strengthening and that could mean higher rates down the road.
If you have a variable-rate loan such as a credit card or an adjustable-rate mortgage you will see your rates go up in the coming months. And if you’re in the market for a new home or a new car you may want to lock in a low rate now.
What is the federal funds rate?
The federal funds rate is the rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis.
Why do changes in the federal funds rate affect the economy?
Changes in the federal funds rate affect the economy because they can influence the cost and availability of credit.
How does the federal funds rate affect inflation?
The federal funds rate affects inflation because it can influence the cost and availability of credit and changes in the cost of credit can have an effect on inflation.
How does the federal funds rate affect employment?
The federal funds rate affects employment because it can influence the cost and availability of credit and changes in the cost of credit can have an effect on employment.
How does the federal funds rate affect economic growth?
The federal funds rate affects economic growth because it can influence the cost and availability of credit and changes in the cost of credit can have an effect on economic growth.
What is the relationship between the federal funds rate and the prime rate?
The federal funds rate is the rate at which depository institutions lend reserve balances to other depository institutions overnight on an uncollateralized basis.
The prime rate is the rate at which banks lend to their most creditworthy customers.
How does the federal funds rate affect the prime rate?
The federal funds rate affects the prime rate because the prime rate is generally set at a level above the federal funds rate.
How does the federal funds rate affect borrowing costs?
The federal funds rate affects borrowing costs because it can influence the cost of credit.
How does the federal funds rate affect savings?
The federal funds rate affects savings because it can influence the cost of credit and changes in the cost of credit can have an effect on savings.
How does the federal funds rate affect investment?
The federal funds rate affects investment because it can influence the cost of credit and changes in the cost of credit can have an effect on investment.
How does the federal funds rate affect the stock market?
The federal funds rate affects the stock market because it can influence the cost of credit and changes in the cost of credit can have an effect on the stock market.
How does the federal funds rate affect the bond market?
The federal funds rate affects the bond market because it can influence the cost of credit and changes in the cost of credit can have an effect on the bond market.
How does the federal funds rate affect consumer spending?
The federal funds rate affects consumer spending because it can influence the cost and availability of credit and changes in the cost of credit can have an effect on consumer spending.
How does the federal funds rate affect business investment?
The federal funds rate affects business investment because it can influence the cost and availability of credit and changes in the cost of credit can have an effect on business investment.
How does the federal funds rate affect interest rates on loans?
The federal funds rate affects interest rates on loans because it can influence the cost of credit.
