How The Fed's Rate Hike Affects You

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The Federal Reserve announced its decision to increase interest rates by a quarter of a point on Wednesday, putting an end to weeks of speculation. On the minds of many investors and consumers was the question, how does this affect me? Credit card and equity lines of credit will bear the immediate impact of the decision. Other effects, however, will play out more gradually. Here's what experts say we can expect.

How The Fed's Rate Hike Affects You

Ending weeks of speculation on Wednesday, the Federal Reserve raised interest rates by a quarter of a point, signaling the possibility of additional increases to the benchmark interest rate in the months ahead.

The Fed’s decision comes after the economy has regained some of its strength that was sapped during the Great Recession. It lowered rates during the recession to spur economic growth, but with the economy and the job market on the upswing, the increase signals that the Fed no longer thinks it’s necessary to stimulate growth.

The rate hike is the third since the recession and the second in three months.

The main question on the minds of consumers and investors on Wednesday was, how does this affect me? Dentist’s Money Digest® searched various news outlets for insights. This is what the they had to say.

MORTGAGE RATES

Will the move have an effect on mortgage rates? It’s difficult to know, the Associated Press reports, noting that mortgage rates are not typically tied to the Fed’s increases. It’s worth noting, however, that the average 30-year, fixed-rate mortgage has hit 4.2 percent, compared to last year’s 3.65 percent, the AP says. That rate increase tells us that the markets may have already factored in Wednesday’s rate hike.

AUTO LOANS

According to USA Today, whereas mortgage rates may be spared from the direct effects of the Fed’s rate hike, the same cannot be said for Auto Loans. The news outlet’s reporting indicates that whatever increase we see in the benchmark interest rate will also show up in auto loans. The increases, however, may be negligible for consumers — only a matter of $10 or so increase per monthly payment for a typical five-year loan.

BOND MARKETS

As the Guardian points out, the U.S. dollar is still the world’s preferred currency for borrowing. If the interest rate goes up, that could prompt investors to sink money into the U.S., elevating the value of the dollar against other currencies. This would also increase the cost of borrowing, the Guardian notes. As DMD reported earlier this month, for bond-market investors, rate increases typically spell out bad news for current holders. As rates improve, the grass literally gets greener on the other side as higher-paying alternative bonds become available. This makes your less-valuable bonds harder to sell.

CDs AND MONEY MARKET ACCOUNTS

The AP notes that we might see an increase in returns from CDs and money market accounts, though it will likely take a while. Banks, the news agency points out, are in the business of making money. While they’ll be quick to charge borrowers more money to receive capital, they’ll be slower to offer better rates to savers.

CREDIT CARDS AND CREDIT LINES

Bad news if you have a lot of credit card debt. Credit cards will take the first hit under the rate hike, USA Today reports. Consumers can expect rates to rise with the Fed’s increase. The AP puts the increase on a timeline of about 60 days. For context, here is where rates stand at the moment: CreditCards.com puts the average credit card interest rate at 15.07 percent. Home equity lines of credit stand at about 5.21 percent, according to Bankrate. “It’s a great time to be shopping around if you have good credit and (can) lock in zero-percent introductory and balance-transfer offers,” said Greg McBridge, Bankrate’s chief financial analyst, in the AP’s report.

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