On December 14th, 2016 the Federal Reserve increased interest rates for the second time in a decade. The increase was a mere 25 basis points (.25%), making the current interest rate .75% instead of the previous .50%. The interest rate the U.S. Federal Reserve increased was the rate at which banks lend to each other. When their rate goes up, it impacts their customers. So, what does this mean to you? Here’s what you need to know.
The Federal Reserve & Why They Change Interest Rates
The U.S. Federal Reserve is Chaired by Janet Yellen. They meet multiple times a year to discuss economic growth, inflation, employment rates, and consumer spending. All of those factors impact their decisions to lower, keep the same, or raise interest rates. Lower interest rates trigger more consumer spending, charging economic growth, and thus inflation. Higher interest rates slow consumer spending. The Federal Reserve must find the right balance of all economic factors to keep the economy as healthy and productive as possible.
Expect a little bit of short term stock anxiety with the rate increase. Investors may be nervous about how the markets are going to react. More often than not, rate increases can be predicted, and with the rate increase on the 14th having an estimated likelihood of 100%, the effect on the market as a whole is essentially already included in current stock prices. For the short term, don’t panic if stocks drop slightly in price- the market can handle a little turbulence. The stock market is truly a game for long term investors, and your long term investment strategy likely will not be impacted by the rate increase. If you feel the need to call your financial adviser, I’m sure they can calm any nerves.
You might see a slight increase in the rate of return on savings accounts, but don’t bet the farm on it. With such a small increase, banks are more likely to increase interest rates on loans, and leave savings account interest rates alone. We saw this with the rate increase in December 2015, and there’s no better judge of the future than the past. Don’t expect a huge deposit from your bank for interest on deposits, but if they do unexpectedly increase your interest rate, smile and say thank you.
The interest rate on your credit cards will most likely go up in the next month or so. Companies usually increase interest on credit by an equal or similar amount to the Federal Reserve rate increase, but it takes them a little bit of time to implement the increase. Take this opportunity to pay down or pay off your credit cards at the rate they’re at now.
Buying a Home
If you’re in the fortunate enough position to be looking into purchasing a home, know that interest rates will most likely see a moderate increase in the near future. They’ve already increased somewhat in the last month or so. They are expected to continue to rise, however incrementally. It’s better to purchase sooner rather than later, if at all possible. Don’t let the increase dissuade you from purchasing a home all together, or pressure you into the wrong home. A home is great investment for many reasons. It is usually the biggest one in a person’s life, so make sure it’s the right one. Regardless of rate increases, you’re starting at a reasonably low interest rate percentage, around 4-5%. The 44 year historical average sits at 8% so you’re doing better than the average. Try to get a Fixed Rate mortgage so you won’t be impacted by another rate increase, as you would be with an Adjustable Rate Mortgage.
Also, if you are currently in an Adjustable Rate Mortgage, now would be the time to refinance into a Fixed Rate to take advantage of the current interest rate environment.
Economists are predicting even more interest rate increases by the Federal Reserve in 2017. Take advantage of the current interest rates. Make the most advantageous financial decisions possible. However, it is important to understand that the Fed’s future decisions will be greatly impacted by how the economy handles this rate increase.
Don’t panic when you hear about the Fed raising interest rates. It’s not the end of the world, in fact, it usually means they believe the economy is improving. Here’s to hoping they’re right.
All recommendations are personal opinion and may not necessarily be what’s right for everyone.
Image Credits: Alex Brandon, AP