On March 15th, the Federal Reserve raised the benchmark interest rate by a quarter-point to a range of 0.75-1.00%. The increase was widely anticipated and represented a vote of confidence in the U.S. economy.
This was the central bank’s second rate hike in three months and Wall Street took it in stride with the S&P 500 rising nearly 15 points on Wednesday. The Fed is still projecting a total of three interest rate hikes through 2017. (1,2)
So what does this all mean? When the economy picks up the pace, the Fed responds. In the past several months, job growth and economic output have been steady and annual inflation has risen to a rate of near 2%. Given this, the central bank now is confident that economic growth is significant enough to warrant a series of small interest rate hikes. (3)
A rise in interest rates may benefit retirees & savers. While higher rates do imply costlier borrowing, there are also some positives that come with tightening. Rising rates are good for interest-bearing bank accounts and fixed-rate investment yields. Higher interest rates encourage banks to lend more, improving the availability of credit.
Those who travel may benefit. Rate increases often promote dollar strength, meaning you could get more for your dollar when you buy abroad – a much welcomed perk for those who travel.
Interest on car loans and credit cards will likely go up. Consumers can expect to see a rise in the cost of borrowing money. Credit card and car loan interest rates are more directly impacted due to their short-term length and varying interest rates. Look for home equity lines of credit to also be impacted.
Demand for real estate may increase. Even with slim inventory in the housing market, home sales could now get a boost as prospective home buyers may not want to wait much longer to obtain a mortgage. By purchasing a home sooner rather than later, buyers assume they will be locked into a lower interest rate on their mortgage than if they delayed.
However, it is important to note that mortgage rates are only indirectly impacted by Federal Reserve interest rates. Mortgages typically have more correlation with the five, seven, and ten year Treasury bill yields. (4,5)
The rise in interest rates is a positive sign of the strength of the U.S. economy. Sustained economic improvement commonly leads to the central bank increasing interest rates. After the Federal Reserve’s decision on Wednesday, Fed Chair Janet Yellen stated to reporters, “The simple message is the economy is doing well.” The Fed is still projecting a total of three interest rate hikes through 2017. (1)
1 - marketwatch.com/story/fed-raises-interest-rates-by-a-quarter-point-sees-two-move-moves-this-year-2017-03-15 [3/15/17]
2 - bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=3%2F15%2F17&x=0&y=0 [3/16/17]
3 - nytimes.com/interactive/2017/03/15/business/federal-reserve-interest-rates.html [3/15/17]
4 - bankrate.com/finance/federal-reserve/benefits-higher-interest-rates-from-federal-reserve-1.aspx [3/15/17]
5 - https://www.lendingtree.com/mortgage/affect-of-fed-on-interest-rates-article
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