WBIR: Finally…the Federal Reserve announced Wednesday that it was raising key interest rates for the first time in 9 years. But what does a rate increase mean for the typical family? Joining us now with answers is Paul Fain, a Certified Financial Planner with Asset Planning Corporation.
PAUL, BEFORE WE TALK ABOUT IMPACT, LET’S RECAP WHY THE FEDERAL RESERVE CHANGES INTEREST RATES…
The Federal Reserve attempts to stabilize our financial system by influencing key lending rates. If economic growth is getting too hot, they raise rates. If economic growth is sluggish they can lower rates and promote consumer borrowing. Following the 2008 economic crisis, the Fed lowered rates to 0.
WITH THIS SMALL RATE INCREASE, HOW DOES THAT EFFECT BORROWERS?
- Federal Funds Rate: range 0.25% to 0.50%
- Bank Prime Lending Rate: 3.50%
- + 2% trajectory: Expect loan rates to increase about 2% over the next 1-2 years.
[The prime rate is among the most widely used benchmarks in setting home equity lines of credit and credit card rates. It is based on the federal funds rate, which is set by the Federal Reserve.]
WHAT ABOUT SAVERS, WILL THIS RATE INCREASE PASS THROUGH TO SAVINGS ACCOUNTS?
- No immediate impact: Banks did not immediately increase interest rates on savings accounts or certificates of deposit.
- Bank margins wider: Margins have been squeezed by low interest rates – banks make money off the difference between deposit rates and lending rates.
- Maybe after 1-2 more rate hikes: It will likely take at least a couple of rate hikes before that materializes.
[Rates have to rise quite a ways until we get back to those days of 3% to 4% on CDs.]
SO WHAT ACTIONS SHOULD CONSUMERS BE TAKING NOW?
- Find better returns by shopping around.
- Consider online banks, community banks, credit unions.
- Refinance out of adjustable rate mortgages and lock in a fixed rate.
- Grab the zero percent and other low-rate credit card balance-transfer offers now while you still can.
- Have a game plan for paying down your home equity line of credit, or consider refinancing it into a fixed-rate loan.
Learn more about Paul Fain and his team here.