How Fed rate hike will affect U.S. consumers
Washington — Credit card holders will soon pay more. So will people with adjustable-rate mortgages or home equity lines of credit.
But most would-be home buyers needn’t worry. And auto loan rates won’t likely change much. For savers? Rates should creep up, at least for the highest-yielding CDs and saving accounts, though on average they’ll still pay a pittance.
The cumulative impact of another Federal Reserve interest rate hike — its fourth in 18 months — will range widely for individuals and businesses with loans or income-producing accounts.
When the Fed lifts the short-term rate it controls by one-quarter of a percentage point, as it did Wednesday, it typically translates into a quarter-point rate increase for credit card debt and home equity lines, as well as for some adjustable mortgages.
Fed policymakers have raised their benchmark rate to a range of 1 percent to 1.25 percent and indicated that they foresee one additional hike this year, assuming that the economy remains on solid footing.
For someone with a $5,000 credit card balance who makes a minimum payment each month, the Fed’s four rate increases since December 2015 equal an additional $700 in payments over the life of the loan, according to Greg McBride, chief financial analyst at Bankrate.com.
“That’s where consumers are feeling it and are going to continue to feel it,” McBride said.
But home and auto loan rates are another story: Despite the Fed’s moves, they’ve barely budged since December 2015, when the central bank announced its first increase after seven years of near-zero rates.
Here are some questions and answers on what the Fed’s moves could mean for consumers, businesses, investors and the economy:
Q. Why haven’t mortgage rates increased?
A. Because fixed-rate mortgage rates don’t typically follow the Fed’s changes. Sometimes they even move in the opposite direction. So it doesn’t necessarily make sense to rush into buying a home or refinancing a mortgage. The hike often won’t translate into higher mortgage rates.
Fixed long-term mortgages tend to track the rate on the 10-year Treasury, which, in turn, is influenced by such factors as investors’ expectations of future inflation to global demand for U.S. Treasurys.
In December 2015, a week before the first increase, the average 30-year fixed mortgage rate was 4.06 percent, according to Bankrate.com. It actually fell for most of 2016, then jumped later in the year and peaked at 4.44 percent in mid-March this year.
But since then, long-term mortgage rates have declined and are back to almost exactly where they began: The 30-year averaged 4.04 percent last week.
Even the increase that began in late 2016 had little to do with the Fed. Rather, investors dumped Treasurys and bought stocks in anticipation of faster growth and higher inflation after Donald Trump’s election. Better growth overseas also raised optimism.
But as Trump’s tax and infrastructure spending proposals have stalled, investors’ outlooks have dimmed. Demand for the 10-year Treasury has risen, and so its yield has dropped, reducing mortgage rates with it.
Other factors can also keep rates low. When global investors grow nervous, they often pour money into Treasurys because they’re seen as ultra-safe. That buying pressure holds down Treasury rates.
Q. So where will home loan rates go from here?
A. Hard to tell. The Fed expects to lift its benchmark rate one more time this year and three times in 2018. Eventually, those increases should put upward pressure on mortgage rates, but it’s impossible to say when.
Mortgage rates are still very low by historical standards. Before the Great Recession, the 30-year rate had never dipped below 5 percent.
Q. How could the Fed’s actions affect other countries around the world?
A. Higher rates in the United States tend to attract more investment from overseas. The European Central Bank and the Bank of Japan are still keeping their benchmark rates near zero to try to stimulate those economies. So investors can earn more by investing in dollar-denominated assets.
That inflow pushes up the value of the dollar, which can make U.S. exports costlier overseas. It can also pull money out of developing countries, where rates are usually higher but government bonds carry more risk. A flow of funds out of developing nations can lower their currencies relative to the dollar, making it harder for businesses in those nations to repay debts they have incurred in dollars.
Q. My credit rating isn’t so great. How will I be affected?
A. Doug Amis, a certified financial planner in Cary, North Carolina, says consumers with less-than-sterling credit can expect to pay more, especially when financing the purchase of a used car. “There’s going to be an opportunity to increase those rates higher,” Amis said. “So if you have poor credit, this is going to impact you.”
Still, even with another rate hike, the impact on consumers and businesses is likely to remain mild, as rates remain very low, relative to years ago, Amis noted.
Q. Have the Fed’s moves boosted the puny rates available for savers?
A. In a few cases, yes. McBride says some smaller banks are starting to offer higher rates on CDs and savings accounts than larger banks are. The huge national banks already have “more deposits than they know what to do with,” McBride said, so haven’t lifted their rates at all.
As a result, the disparity between the smaller local banks and nationwide institutions is widening, he said: “Exploit that difference. It’s money in your pocket.”
So far, the average rate on a one-year CD has barely risen since the Fed’s rate hikes began, inching up from 0.27 percent in December 2015 to 0.35 percent now, according to Bankrate.com. But the highest-yielding CDs have risen from 1.35 percent to 1.5 percent.
Q. What if I’m a retiree invested in bonds?
A. Amis says he tells his fixed-income clients not to stress out over another rate hike.
“This is part of investing in fixed income, and it’s not a signal to jump ship and go into dividend-paying equities,” he said. “I would recommend they stay the course and earn the coupon.”
Since rates began rising again, Amis has been advising retirees and others with fixed-income investments like bonds to ensure that their portfolios are balanced between very short-term and long-term bonds. Longer-term bonds typically pay higher rates, and as rates rise, the short-term securities will be replaced with higher-yielding ones.
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