In between the wild weather around the U.S., the shocking news that everyone would rather order their holiday gifts online and the much-anticipated release of the new Star Wars movie, the Federal Reserve made a move that they haven't made in nearly 10 years--they raised the interest rates.
While this might not seem like earth-shattering news to you, the impact that it will have on consumer services like credit cards, adjustable rate mortgages, CDs, savings accounts and car loans could have an impact on your budget in the months to come.
The last time the Fed raised rates was June 2006. Since then it’s been a steady drop in the Fed rate all the way down to a whopping 0%. The idea was to stimulate the economy and to entice you, the consumer, to go out and spend money, because the more money you spend, the more likely the economy will rebound. However, with stagnant job growth and pressure on most employers to lower salaries, consumer spending has taken some time to help rebound the economy.
The Fed decided in December 2015 that the economy was finally strong enough to begin the gradual spike in the Fed rate, starting with a .25% increase. These rate increases might seem small initially, but the Fed has grand plans for raising the rates even higher in 2016, although they might be a little too ambitious. As Greg McBride, CFP and Senior Financial Analyst with Bankrate.com states, "The Federal Reserve is a bit overly optimistic claiming their aim is to increase rates four times this year. What consumers should expect to see is two to three rate increases spread out over the course of the year."
While the impact on some consumer products might not be felt, or will have a minimal impact, the impact on other products will be felt sooner rather than later. Here’s a breakdown of what you can expect in 2016.
Ouch…I felt that! What might change since the Fed raised interest rates
Credit Cards and Home Equity Line of Credit (HELOC)
You're going to feel the sting of the higher rates with credit cards and HELOCs before you feel it anywhere else. Generally, within one to two statements you will notice the increase in the interest rate the credit card company or bank is charging you. The only way to escape this interest rate pinch is to maintain a zero balance on your credit cards and HELOC.
What you can do: In 2016, look for credit cards that offer 0% transfers to lower your out-of-pocket interest expenses while you work towards a zero blance, and make sure your budget accounts for a higher payment on your HELOC.
Adjustable Rate Mortgages
Most adjustable rate mortgages adjust only one time a year, which means you might not feel the rate increase immediately. While this is great news for your budget right now, if the Fed raises rates two to three times during the year, meaning a .25-.75% total increase, your next adjustable rate might catch you off guard.
What you can do: Contact your mortgage company throughout the year so you can stay on top of when your rate will adjust and what the likely increase will be.
What Fed hike? Products that will remain relatively untouched (for now)
These types of loans will see a minimal impact on affordability in 2016. "Consumers can still expect to see rates at 4% interest or below for new and used cars for 2016. In fact, a .25% rate increase on a $20,000 car loan will only net a $3.00 a month difference in car payment. Most consumers won’t even flinch," says McBride. While car loans with banks and credit unions might expect to see a higher increase in the interest rates, car dealers will still be offering low financing offers, even the popular 0% offers that we saw last year.
Fixed Rate Mortgages
There is no direct connection between the Fed raising rates and fixed rate mortgages, which is good news to borrowers. Experts suggest that likely we will see a modest increase in mortgage rates from the low 4% range where they are currently at to around 4.5% by the end of the year. By any token, it is still a great time to buy real estate with these historic low rates.
CDs and Savings Accounts
Unfortunately, for savers the landscape has not changed since 2015, and rates will remain flat for at least the next couple of rate hikes. It's a trickle-down effect: The interest rates with CDs and savings accounts trail the rate of inflation, so until inflation grows, these rates will stay disappointingly low. That's not always a bad thing, though. "It's a double-edged sword. If we want higher interest rates on savings that mean inflation will have to increase, so, in essence, we will be paying higher prices for goods and services that erode our savings affords," states McBride. As always, the only remedy is to keep saving and investing no matter what the interest rate might be.
Without a crystal ball, it's impossible to know for sure what the Fed will do in 2016. All signs point to a consistent posture to raise rates for the foreseeable future. As a consumer, it's best not to ignore the news of a rate increase, but instead to figure out how this will impact your budget and make a plan for any additional costs that will trickle down to your monthly expenses.
Photo: Theodore Scott