Fed Rate Hike : What does this mean for me?
The Federal Reserve (The Fed) has raised interest rates after much talk of doing so this year. This hike comes just in time for the new year and a new administration coming into office.
How will this rate hike affect you and what exactly does a “rate hike” mean?
These rates are affected by a hike that will in turn affect consumers.
Discount Rate
This is the interest rate that a bank must pay when they borrow money from the Fed. The Fed directly decides the Discount Rate based on the current state of the economy.
Discount Rate = 1.0% up from .75%
Fed Funds Rate
This is the rate that banks must pay when they borrow from one another. It is determined by the demand and supply of loanable funds on the open market. The Fed sets a target for the Fed Funds Rate and then will buy or sell Treasury bills in order to indirectly affect the rate until that target rate is reached.
Fed funds Rate target range = 05% – .75%
Prime Rate
Prime rate is currently 3.75%. This is always 3% over the top of the Fed Funds Rate target range.
Average credit card = Prime + 14.3% = 18.05%
Average Home Equity Loan = Prime + 1% = 4.75%
Before open market operations (buying and selling Treasury bills to alter the Fed Funds Rate) the discount rate was the primary tool used to expand or contract the money supply. Nowadays the Fed primarily uses the Fed Funds Rate, and many businesses pay significant attention to what target the Fed announces. In addition, adjusting the Fed Funds Rate gives the Fed far more flexibility and power in its monetary policy than does the discount rate because the Fed can precisely control how much in T-bills to purchase, while the Fed cannot precisely control how much banks borrow from the Fed.
Now, on to how this affects you:
Should you worry about shopping for a home?
The short answer is no. There are a lot of areas to consider when buying a home and it is very difficult to get them all to align perfectly. If you’re all set to buy, don’t let a slightly higher interest rate deter you. Even though the trend looks as if we could see interest rates continue to rise, let’s not forget that were starting from a very low floor. It will take a long climb for interest rates to hit the historical average of 8%. So if you’re locking in a rate between 4-6% you’re doing really well long-term.
Questions about a purchase or refinance? Follow this link to learn more.
What about my Savings Account?
You could see rates on savings accounts go up, but it won’t be immediate and it probably wouldn’t be significant. Banks typically don’t weigh a Fed rate increase heavily when making decisions on savings rates. However, banks do look at how competitors react to a Fed rate hike; so if some banks start to raise savings rates others may follow suit.
How about my CDs?
Most standard CDs come with fixed interest rates, so those would not change. Some banks offer bump up CDs that let customers request a rate increase if bank’s rates rise. Usually you may only request this once in the lifetime of the CD, and they typically have lower interest rates to start with and require higher deposits. If you do have one, keep track of your bank’s rates and ask to adjust your CD accordingly.
Credit Cards?
Interest rates on credit cards will most likely go up. They trend higher or lower with the prime rate. One thing to keep in mind is that you may not hear about it if it does increase. There is an exception to the 45-day notice rule on APR increases if it is triggered by a prime rate increase. Keep an eye on your statements. It’s always a good idea to keep credit card balances low, but even more so if your APR increases. Your APR also affects how minimum payments are calculated and that could increase as well.
For more tips on how to be Smart With Your Money go to www.smartwithyourmoney.com
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