The Fed Raises Short-Term Interest Rates

Hingham real estate trends

What Will Happen Now that the Fed has Raised Rates?

Nothing much is the short answer. We have hung onto each announcement made by the Federal Reserve for months now. Long-held anticipation can create a fertile environment for growing thoughts and imagined scenarios. It can also help us adapt in healthy ways.

In a vote of confidence, the Federal Reserve raised short-term interest rates for the first time in almost ten years on Wednesday. The Fed emphasized that future increases would come at a slow pace.

Rumblings of Fed rate increases have been well-publicized and well-dosed since the end of 2014, if not before. You might recall in 2013, that then-Fed Chair Ben Bernanke mentioned slowing down the Fed’s efforts to boost the economy. Interest rates shot up and the market responded with utter panic.

Starting in December of 2008, the rates have hovered close to zero, and this has had mixed results. Unemployment is down, but raises are pitiful, and the economy isn’t as strong as it could be. Most economists and financial industry experts expected the zero percent rates to change earlier than this.

Even though the Fed’s rates have made the first increase since the iPhone was invented, rest assured that nothing abrupt will happen. Interest rates on mortgages, loans and savings accounts are likely to stay low for years to come. Many believe that the Fed’s actions are a carefully choreographed plan that will set in motion a gradual increase of the federal funds rate and a gradual public adjustment.

The federal funds rate is what banks charge each other for overnight loans and this has a negligible effect on loan pricing. Your savings accounts might yield slightly higher rates as will certificates of deposit, but you will barely notice the returns. Credit cards, home equity loans, auto loans, student loans and adjustable-rate mortgages will show only a slight increase, one that will show little impact on consumers.

The Fed’s script should go easy on us and it is expected that rates will rise by 1 percent by the end of next year. Keep in mind that prediction is a tricky business and not worth investing your worries in. Here are some specifics related to rate increases:

Your bank account rates will likely stay the same. Interest rates go up when banks want more deposits ( more cash on hand), but most banks have plenty of cash now. Even now with a rate increase, the progression will be slow.

Certificates of deposit, or C.D.s haven’t changed in response to the anticipated Fed rate hikes, and aren’t likely to respond to the real increase. This is an sign that your C.D.s might not improve much. In 2008 the average yield on a one-year certificate of deposit was 3 percent and now it stands at about 0.27 percent.

Since money market mutual funds generally invest in short-term government securities, it will take about 40 days for those yields to rise. Fundholders can generally expect yields to rise from about 0.10 percent to 0.35 percent, although each fund provider varies.

Bonds usually respond to rate increases by dropping, since investors can buy newer bonds issued at the higher interest rates. The good news is that the bond market already responded to the Fed’s hints and by pricing in the rate increase.
Most of us think that mortgage rates have a direct relationship to the Fed’s action, but that is simply not true. The Fed has control over a short-term rate, and your 30-year fixed-rate mortgage is usually priced from 10-year Treasury bonds. The Treasury bond is influenced by multiple factors, and while the short-term rate is one of them, so is the economic forecast.

Even though some mortgages tend to rise with the Fed’s benchmark rate, the relationship is not automatic. Mortgage rates declined during the housing boom, even as the Fed raised short-term rates.

Adjustable-rate mortgages and home equity credit lines are more directly affected by the Fed’s decisions. Some of these rates have already responded by moving up slightly in recent weeks, but are still around 3.17 percent. This makes it a good time to consider refinancing into a fixed rate. Most financial advisors agree that for those with active adjustable-rate mortgages, the cumulative effect over the next couple of years could be significant. If you have an adjustable-rate mortgage but with a locked fixed rate for several years, you have some time to wait things out.

Interest rates on home equity credit lines will correlate positively with the Fed’s increases and move to about 5.5 percent. As a borrower, you can ask to lock into a fixed rate on whatever your existing balance is and pay about 6.20 percent. Whether or not this makes sense depends on your balance and the length of time it will take for you to pay it back.
If your credit card has a variable rate, you can expect that this rate will rise within a month or two. If you notice credit cards offering an introductory rate which is zero percent, look at the length of time this rate is in effect. Many are offering zero percent for 18 months. This is a good time to consider taking advantage of these offers. Car loans might also offer incentives to help keep borrowing rates down.

Many student loans are federally funded and have a fixed rate, but new loans are priced every July. This pricing is based on the 10-year Treasury bond.

There is some use for anticipatory worry in this case. We are already used to the idea that rates will be increasing. This could dampen reactions of panic and avoid abrupt changes to our nation’s economic base.

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