Last October it appeared that the Federal Reserve Board might maintain the status quo. However savvy insiders knew better. Comments made at the October Federal Open Markets Committee meeting indicated that a rate hike was highly likely in the near future, probably in December. Across the globe, all eyes were on Washington, waiting for the results of the “historic” Board meeting. No one was disappointed, after seven years of close to 0 percent interest rates, the Feds announced on 16 December, 2015 a .025% hike.
Why raise interest rates?
In considering whether to raise interest rates, the Board said it was motivated by the improving US job market and stabilizing global economies, especially in China. According to Janet Yellen, Fed Reserve Board Chairman, the objective is to dampen enthusiasm for borrowing, and thereby protect the economy from inflation. This is not a one-time deal, though. There will be a slow trickle of federal interest rate hikes over the course of the next year.
No one expects earth-shattering results from a quarter percentage point rate hike. The concern is about future rate increases—how big will they be and how often?
What does all this mean for you?
Everything depends upon what the Fed Reserve Board does in the coming months. If, as they say now, there will be a series of very small increases over the next year, the result will be negligible for most consumers. But, if the Board increases interest rates more quickly and ultimately to a larger amount than suggested today, then the results could be painful for certain sectors of the economy and possibly you, the consumer.
The good news:
- If you have money in savings accounts, money markets or other savings instruments, the rate hike is good news for you. This especially true if you are a retiree living off your savings investments and social security checks.
- A rise in the interest rate also results in a stronger dollar against foreign currencies which is good news if you are planning to do some traveling. Your dollar will go much farther, making that 5-star luxury hotel much more doable.
- If you like imported goods, the rate hike is good news. As foreign products, such as wine and coffee become more affordable, purchases will increase and the quantity of product will improve. Exporting countries also benefit as increased production means more jobs for their citizens.
The not good news:
- One of the most immediately affected category of consumers will be the credit card holder. If you have high balances on your credit cards, an interest rate increase is not good news for you. You will find yourself with a higher monthly bill.
- Mortgage interest rates will increase according the federal rate increases, putting a damper on the housing market which will trickle down to sellers, builders and real estate agents. If you already have a home financed with a variable rate mortgage, increases in the interest rate is not good news. Your monthly payment will increase, leaving you with less disposable income.
- If you are in the business of producing product that has a primarily overseas consumer base, the fed hike is not good news. While product coming in will be cheaper, product going out will be more expensive. It is a reverse situation with foreign tourists too. While traveling overseas will be great, foreigners coming to the US will find that their currency does not go as far, potentially reducing the number of foreign tourists and your annual income if you are in the hospitality business.
- Depending upon when you took out your student loan, the rate increase may not be good news for you. All federal student loans issued since 2010 are fixed-rate loans, so interest rate increases will not impact you. Federal student loans issued before 2006 though, are variable-interest rate loans, meaning your monthly payment will increase. If you refinanced your loan with one of the emerging student loan lenders, such as Earnest, SoFi or Commonbond, you also have a variable rate loan, which means you will see an increase in your monthly payment.
Bottom line: probably this “historic” day will not impact you very much right away. How the Feds deal with future hikes, which are sure to come, is of more importance. Best plan of action for now is to pay off your credit cards, consolidate your debt, check all of your loan instruments and increase your savings.