Wednesday morning, March 15, the Federal Reserve raised its benchmark short-term interest rate by a quarter percentage point. The logic behind this decision is that the economy has strengthened significantly since the Great Recession ended in 2009. Back then, low rates were needed to sustain growth, but now “We are in a rising interest rate environment,” claims Nariman Behravesh, chief economist at IHS Markit.
Who will this affect? Most likely it will be those with credit card debt, adjustable-rate mortgages and home equity lines of credit. It’s the cumulative effect that’s important, especially since the Fed already raised rates in December 2015 and December 2016. The higher interest rates could add up to hundreds of dollars per month in extra fees.
Mortgages rate increases aren't generally correlated with Fed increases, but it's hard to say if they will steadily increase. Thirty-year fixed mortgage rates hit a 2017 high last week as the average jumped to 4.21% in anticipation of the Fed’s move Wednesday and another similar hike. That is up from a year ago when the average 30-year mortgage rate was 3.68%, according to Freddie Mac. After the announcement Wednesday of the Fed's rate hike, the yield on the 10-year Treasury actually dropped from 2.60 percent to 2.49 percent. This suggests that investors were pleased that the Fed said it planned to act only gradually and not to accelerate its previous forecast of three rate hikes for 2017.
Credit cards, home equity lines of credit and other variable-interest debt rates will rise approximately the same amount as the Fed hike within 60 days, said Greg McBride, Bankrate.com’s chief financial analyst. That’s because those rates are based in part on banks’ prime rate, which moves in tandem with the Fed. If you have good credit and can secure 0% introductory rates for balance transfers, now is the time to do so in order to avoid paying higher interest rates. Car loans tend to be affected more by competition than federal rates, so we don't expect to see a noticeable change there.
For a great Q&A article on the Fed rate hike, click here.