While the Federal Reserve Board’s 0.25 percent interest rate hike in mid-December made big news, there’s no need for consumers to grow panicky.
In fact, in the world of macro-economics, the hike is actually a sign of the Fed’s increasing optimism about the U.S. economy, according to The Wall Street Journal. The Fed, chaired by Janet Yellin, oversees Federal Reserve Banks and is a key body in implementing the country’s monetary policy.
“On the whole, the impact of a quarter point rate hike on U.S. households should be minimal,” says Curt Long, Chief Economist for the National Association of Federal Credit Unions, in a recent story in National Mortgage Professional Magazine.
Here is a rundown of how the increase could affect the most common types of loans. Keep in mind that the Fed has only increased its interest rates twice during the past decade, so most of today’s rates are very low.
Of all the items that could be affected most by the interest rate increase, credit cards are towards the top of the list. According to CreditCards.com, credit card holders will most likely see interest rates on card balances increase about the same at the Fed’s rate hike, since most credit card rates are variable and are directly impacted by the hike. Although minimal, we are already seeing the effect. CreditCards.com reports that the national average Annual Percentage Rate (APR) has jumped slightly to 15.29 percent since the Fed increase.
Three more rate hikes by the Fed are anticipated in 2017, which should be a warning sign to those four out of every 10 consumers who maintain a balance month-to-month on their credit cards. These consumers should consider paying off their cards or reducing their balance sharply.
“People do need to be prepared for what those extra rate hikes could mean, because if you do carry a balance, and they do raise it two or three times over the next year, it can have a real impact on what you owe,” says Matt Schulz, Senior Analyst with CreditCards.com, as reported by Consumer Reports. “It really is yet another reason why it’s so important to pay your credit card debt off as soon as you possibly can.”
With low rates and attractive terms, auto loans offered by credit unions continue to be very popular. One credit union member recently took advantage of her credit union’s special year-end program and refinanced her new-car loan from 4.99 percent to 2.5 percent, and this was after the Fed rate increase.
Although auto loan rates will most likely inch up in the year ahead, especially if the Fed continues with its planned rate increase, the effect will be relatively minor. For instance, a typical five-year auto loan that increases a quarter of a percent to 4.25 percent will mean the monthly payment for a $25,000 auto loan could increase about $3 a month now, and $12 to $16 a month if all three of the Fed’s proposed hikes happen this year. “Nobody is going to have to downsize from the SUV to the compact because of rates going up,” says Greg McBride, Chief Financial Analyst with Bankrate.com, as reported on CNBC.
Fixed-rate home loans have been at very-low rates – now below four percent – fueling what has been a housing boom for both buyers and sellers for the past several years. For those who qualify, home mortgages have been a great deal and the Fed increase is expected to have little if any effect on fixed-rate mortgage rates, according to Doug Duncan, Chief Economist for home loan lender Fannie Mae, as reported by USA Today. (Due to the fact they can fluctuate, variable-rate mortgages generally carry higher interest costs, which makes fixed-rate loans preferable.) Duncan points out that even if the Fed raises its rate by a percentage point over the next year, the rate of a 30-year, fixed-rate mortgage will still be between 3.9 and 4.1 percent by the end of 2017.
With this in mind, the average mortgage nationally is about $237,000. If the borrowing rate were to rise by another percentage point in the coming year, that would mean an additional $138 a month on the average mortgage. This is probably not enough to deter most buyers, especially if the housing market continues to be as robust as it is today.
The Fed meets eight times per year, with the next meeting scheduled for Jan. 31-Feb. 1, 2017. You can keep track of when the body meets here.