The Fed Raised Interest Rates: How It Will Affect Your Wallet

The Federal Reserve System (Fed) on Wednesday, December 19, raised its base rate by 0,25 percent for the fourth time this year, despite months of objections from President Donald Trump.

Фото: Depositphotos

The president feared that higher interest rates would halt the rapid growth of the country's economy, writes CNBS.

The move was the fourth rate hike this year and the fourth for Fed Chairman Jerome Powell appointed by Trump. Trump has now hinted that he regrets Powell’s appointment.

“The economy is growing, but every time we do something great, he raises interest rates,” Trump said in an interview in October.

On Tuesday, the US president tweeted that the Fed should "feel the market." Nevertheless, Powell, for his part, pointedly pointed out the unstable position of the Fed.

Powell's challenge at this stage was to show that the Fed's decision was made in light of the data and not out of deference to the political establishment—which would have jeopardized the central bank's credibility as an independent agency.

The main market conditions that the Fed had to analyze:

• forecasts of global economic slowdown,
• continued geopolitical tensions
• reduction in the price of oil by 30 percent,
• slight decrease in core inflation.

But with a steady domestic economy, wage growth and the lowest unemployment in almost 50 years, the Fed eventually decided to move away from monetary policy when interest rates were kept artificially low to help America recover from the Great Recession.

On Wednesday, the decision was followed closely by markets and economists. 70% expected rate hikes.

How the rate hike will affect Americans

Edition USA Today described how the changes will affect ordinary Americans.

Credit Card Holders

Credit card rates are usually tied to the base rate, which, in turn, depends on the Fed's base rate. Credit card holders will face card rate increases in one to two billing cycles, says Greg McBride, chief economist at Bankrate.

According to Bankrate, average credit card rates are 17,6 percent. According to Nick Clements, co-founder of MagnifyMoney, for a credit card balance of 10 000 dollars, a quarter-point increase can add 2 dollars a month to the minimum monthly payment. According to McBride, the cumulative effect of nine increases from the end of 2015 onwards is + 18 dollars per month.

What to do: Paying the balance monthly, you completely avoid interest accrual. If you see that you have large outstanding balances, consider the possibility of combining them into a personal loan with a lower fixed rate or transfer to another credit card, which offers zero percent for the initial period.

“Not only does this protect you from further rate increases, but it also puts you in a good position to pay off that debt in full,” says McBride.

Credit line secured by residential real estate

If you choose a loan secured by real estate, it will be more expensive to buy it back. Most of the credit lines secured by residential real estate, or HELOC, also track the basic rate. As with credit cards, the rate increase will take effect within 30 – 60 days.

Interest rates on home equity lines of credit are much lower, at 6,27 percent, according to Bankrate. A quarter point increase on a $30 line of credit increases the minimum monthly payment by $000 per month.

What to do: McBride recommends asking your lender to fix the interest rate on the amount you have already borrowed. Future rate increases will be applied only to additional loans. Or request refinancing as a fixed-rate loan or HELOC refinancing from another lender who will offer a lower initial rate.

Homeowners

Unlike credit cards and HELOC, mortgage rates change annually. Thus, the impact of a Fed rate hike can strike right away. If you have a fixed rate mortgage, the changes will not affect you.

This year, the average rates will increase by about half a percent to 4,04 percent. According to MagnifyMoney, this will increase the monthly payment on a new mortgage on 200 000 dollars by approximately 70 dollars.

What to do: If you are worried about future rate increases, talk to a mortgage banker about refinancing a fixed rate mortgage loan. Initially, the monthly payment may be higher, but in the long term will not change.

Buying a house

The Fed's key rate affects the 30-year mortgage—the most common home mortgage—and other long-term rates only indirectly. These measures more closely track inflation expectations and the long-term economic outlook.

The average 30-year fixed mortgage rate has already risen to 4 percent from about 4,63 percent in early January, largely because investors expect federal tax cuts and spending increases — along with a healthy economy — to fuel higher inflation. The current rate increase is already built into mortgage rates.

For home buyers, any impact on a monthly bill is likely to be relatively small. Increasing the rate by a quarter point on a mortgage loan in 200 000 dollars would increase the monthly payment by about 30 dollars.

Other steps the Fed can also play a role. A year ago, the Fed announced that it was gradually reducing its bond portfolio accumulated during and after the financial crisis in an attempt to lower long-term rates. This probably has a greater impact on fixed mortgage rates.

What to do: As soon as you enter into a contract to buy a house, fix the interest rate to protect yourself from any fluctuations. Otherwise, focus on improving your credit rating and paying off other debts to get a better rate.

Buying a car

Monthly payments on a new car loan may also increase, although many buyers will not feel it.

Five-year auto loan rates currently average 4,93 percent, according to Bankrate. A quarter point increase could theoretically increase the monthly payment for a new car worth 25 000 dollars by 3 dollars. This applies to new car loans, and existing loans will remain unchanged.

What to do: look for offers. “Car manufacturers often offer discounted financing to encourage car sales, and banks and other lenders compete with those rates,” Kapfidze says.

Student loan

Many private student loans come with variable interest rates, which depend on the base rate.

Federal student loans have a fixed interest rate set by Congress and are not influenced by the Fed.

What to do: Compare offers to consolidate your student loan debts into one with a lower interest rate.

Depositors

Since banks will be able to take a little more for loans, they will have a little more opportunity to pay higher interest rates on customer deposits.

But do not expect a quick or equivalent increase in interest on savings accounts. Now the interest rate on savings accounts varies within 1%. These figures almost did not change last year, despite the Fed's increase.

What to do: online and public banks and credit unions pay up to 2,8 percent for a one-year deposit, compared to 2,15 percent in March.

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