When the Great Recession hit, the Federal Reserve reduced key interest rates to all-time lows to try to get the economy going again. Fast forward to 2018, and the economy and stock market are doing well. So now the Fed tends to want to raise interest rates to keep growth under control and not cause inflation, which undermines the value of the dollar. When the Fed raises interest rates, it affects both the broader economy, the average consumer and home buyer.
In December 2017, the Federal Reserve increased the Federal Funds Rate to 1.5%. This is the highest it has been since 2008. It appears that the Fed will not raise rates again this quarter as fears of inflation have eased. Let’s take a look at what the Fed’s latest move means for you.
The Fed and Interest Rates
The Fed uses interest rates to control how much the economy grows or shrinks. The lower the interest rates are, the cheaper it is to borrow money. This tends to lead to economic growth. Businesses are able to borrow money to expand their companies and to stock more inventory. Consumers use their cheaper credit to make purchases they may not have made. But when the economy starts to grow too fast, the Fed may raise rates to slow things down.
When interest rates are raise, credit card debt is more expensive. The general interest rate increases in the last several years mean that debt is getting more expensive to hold for consumers. Climbing interest rates are bad news for people with credit card debt as this is always expensive even in low interest rate environments.
Most credit cards base their interest rate charge on the prime rate, which is the lowest rate at which banks will lend money. Credit cards may charge you the prime rate plus 12%. If the prime rate is 4%, you would pay 16% interest on credit card debt. As of today, it does not appear the Fed will be raising rates, so it is likely that credit card debt will not get more expensive in early 2018 than it is right now.
Fixed Rate Debt Is the Same
If you have a mortgage, you are probably interested in knowing how rate changes affect you. If you have a fixed rate mortgage, you do not have anything to worry about. If your mortgage rate is at 4% and is fixed for 30 years, it will not change. But if you are planning to buy a new home, you will be affected by rate changes. Mortgage interest rates have been going up, with rates hitting the mid fours this month. Whether this will change depends upon what the Fed does with the prime rate in the coming months.
People who are thinking about buying a home in 2018 may want to consider getting in the game now. If you are going to close on a home in the next 30 to 60 days as of January 2018, it probably is advisable to lock your rate for as long as you can. Experts say that this is not a lending environment where you want to leave the rate floating and hope that the rates go down. Why?
Our view is that mortgage interest rates have been artificially low for some time. But more people are getting back into the housing market and the economy is doing well. So, it appears that mortgage interest rates are generally going up, regardless of whether the Fed raises rates again in the near future or not.
Savers Benefit from Higher Rates
People buying homes and those with debt do not like higher interest rates. But people with savings accounts like higher interest rates. In the economic slowdown after the Great Recession, bank savings accounts paid very little. But if the Fed raises rates again, savings accounts may start to pay enough interest to make it noticeable.
Bond returns also are seeing better results as interest rates go up. When you buy a bond, you are lending money to a borrower. So, when the interest rates rise, you can demand more of an interest payment from the issuer of the bond. But if you already possess bonds, this will make the bonds you have worth less.
Interest rates that the Fed sets may generally remain about the same in the near future, which can be good news for savers, and also for those with debt. But for people who are shopping for a mortgage, interest rates are probably going to keep rising throughout 2018. Prices on homes are continuing to rise as the economy gets better too. So, if you want to buy a home this year, it is wise to lock in a rate soon before mortgage rates go up again.
References: The Fed Raised Rates Again.