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The Federal Reserve on Thursday decided to leave its benchmark federal funds rate unchanged, but the federal banking regulator indicated that it still expects to raise it for the first time in nearly a decade before year's end.
The Fed’s Open Market Committee adjusts the rate -- the interest rate that banks charge other banks on overnight loans -- to influence the supply of money, control inflation and keep the economy stabilized. The rate has been in the zero to 0.25 percent range since Dec. 16, 2008, when the committee cut it to help the U.S. economy pull out of a steep recession triggered by the housing crash.
Beyond the economic impact, rate changes affect consumers in more direct ways. Don’t expect your finances to change overnight, but the Fed’s decision, whenever it comes, will influence certain financial products and services. Here are five ways you can expect to feel the impact on your pocketbook:
1) Monthly credit card rates jump
Your credit card’s interest rate is probably variable, meaning it can and will change along with the Fed’s rate. If you carry credit card debt, this means you can expect to pay more in interest over time.
“If the Fed lifts the policy rate, credit card companies will increase the variable rate,” said Megan Greene, chief economist at Manulife Asset Management. “Credit card debt has always been among the most expensive to service, so I would recommend anyone with debt pegged to short-term rates work to pay that down as quickly as possible.”
Don’t expect your interest to soar, though. If you’re carrying $5,000 in debt and the credit card company passes along the expected 0.25 percent rate increase of the Fed, you could expect to pay an extra dollar each month. Of course, that amount will vary depending on your debt amount, but the change shouldn't be drastic.
Other debt tied to short-term interest rates include home equity loans and lines of credit, private student loans, and auto loans. Of course, if your loan rate is fixed, it’s not going to change. But if it’s variable, expect to see an increase.
Your payments may continue to rise if the Fed decides to further increase the federal funds rate.
In the meantime, if you’re working to pay off multiple debts, consider prioritizing variable debts with higher rates.
2) Your mortgage could go up – unless it’s fixed
If you have a fixed-rate mortgage, you’re golden. Your interest rate is set and the Fed’s decision won’t impact your loan terms.
But if you have a variable or adjustable-rate mortgage, you can likely expect to see an increase. To put that into perspective, if you’re carrying a $300,000, 30-year mortgage with a variable rate, a 0.25 percent increase in the Fed rate equates to an extra $35 a month. With a $150,000 mortgage, you’ll pay about $20 more a month.
It’s probably nothing to lose sleep over, but it might be worthwhile to lock in a low, fixed rate while you still can, before subsequent rate hikes. As the increase takes effect, rates will be higher for new homeowners shopping for mortgages, too.
Even before the Fed's decision, average long-term U.S. mortgage rates were inching higher. Mortgage giant Freddie Mac said early Thursday that the average rate on a 30-year fixed-rate mortgage edged up to 3.91 percent from 3.90 percent a week earlier, its second straight weekly increase. The rate on 15-year fixed-rate mortgages rose to 3.11 percent from 3.10 percent.
3) Savings accounts pay a little more interest
Bank savings account and certificate of deposit (CD) interest rates have been historically low since the Fed’s rate cut in 2008, with the national average at a paltry 0.06 percent, according to the FDIC. When the Fed raises interest rates, savers can finally expect to see higher yields from such accounts. In 2007, savings account rates averaged about 3 percent, according to the U.S. Census.
It’s tough to predict just how much more we can expect to earn. That depends on a variety of factors, including the type of account you have and how quickly your bank passes on benefits of higher rates to account holders. But if you have $10,000 invested in a one-year CD, and your bank mirrors a 0.25 percent rate hike by the Fed, you can expect to earn an extra $25 a year.
The last time the Federal Reserve began raising rates, in June 2004, it was 90 days before banks paid consumers higher rates for their basic savings accounts, said Dan Geller, who tracks the outlook for deposits at Analyticom. It took 10 months for banks to pay even 0.2 percentage points more on so-called money market deposit accounts and by then the Fed’s rate was up 1.75 percentage points.
4) The job market cools slightly
Part of the reason the Fed is considering a rate increase is that the economy is on the mend and unemployment rates are at a seven-year low. An interest rate hike would be expected to slow hiring somewhat.
If the Fed raises the rate today, that would indicate that it believes the labor market has recovered enough to withstand a slight braking on hiring. But since it is expected to raise the rate only to a range of 0.25 percent and higher, no dramatic change in hiring or the unemployment rate would be expected in the short term.
5) Stocks could see more volatility
The mere expectation of a rate hike impacts the stocks, and speculation that the Fed was getting ready to raise its benchmark rate has contributed to recent market turmoil.
The stock markets are affected indirectly by the Fed’s rate, because investors expect that companies will either cut back on growth or make less profit as it becomes more expensive to borrow. That leads to less demand for stocks, and can lead to broad declines in the markets as a whole.
U.S. markets have largely anticipated that the Fed was preparing to raise the interest rate, so it will take time to see what impact a rate hike will have.
“If it seems possible that the Fed will start hiking rates quickly and sequentially, as it always has done in the past, then consumer and investor confidence might be sunk and spending and investing could halt,” Greene said. “It seems more likely the Fed will make it clear that it will only hike if the data warrants it and plans to do so very slowly,” which would be expected to have a less dramatic impact on stocks.
The Associated Press and Reuters contributed to this report.