After a long period of making few changes to interest rates, the Federal Reserve seems to be moving into a period of rising rates: The Fed announced Wednesday that it will raise interest rates for the second time in four months, the first of what could be a series of increases this year.
As it did in December, the Fed voted to raise the federal funds rate by a quarter of a percentage point. That moves it up to a range of 0.75% to 1%. It’s the third increase since December 2015, after a nearly 10-year stretch during which the rate did not rise.
All the big banks have funds at the Federal Reserve, and the Fed’s pronouncements on rates set how much interest those banks can charge one another to borrow money to meet reserve requirements. It’s the banking world’s equivalent of an emergency fund. (This is why Wall Street watchers sit vigil in anticipation of the board’s every utterance.) That, in turn, dictates terms for savers and borrowers seeking the best ones on deposits and loans.
Now that the Fed has made its pronouncement and the interest rate winds have changed direction, the next step for consumers depends on which side of the saving-borrowing divide they stand. For guidance, NerdWallet’s in-house experts respond to the most pressing questions from savers, homeowners, home shoppers, credit card holders and investors.
Predicting the effect the federal funds rate increase has on any individual investor’s retirement savings depends a lot on his or her near-term plans for the money and what’s in his or her portfolio: Large U.S.-based companies? Foreign stocks? Dividend-payers? Indexed investments? Individual stocks concentrated in particular sectors?
When a rate increase is expected (as this one has been for many months), the effect on the overall market is usually baked into stock prices already, at least partially. It’s reasonable to expect at least a bit of short-term stock market anxiety in response to the news, since Wall Street is notoriously easy to spook. Intermittent volatility in exchange for higher potential returns on your long-term savings is par for the course. The stock market’s post-election dive and quick turnaround race to all-time highs is just the most recent example.
In NerdWallet’s new end-of-year financial savings survey, 17% of Americans said that stock market volatility is one of their top sources of financial anxiety. Our advice for how to handle potential market turbulence remains the same as it always has been for long-term investors: Take a deep breath, don’t make any sudden moves and concentrate on the things you can control. (Fiddling around with a Roth IRA savings calculator is a more worthwhile distraction than fiddling with the investments in your account.) Some other suggestions if you need something to keep your hands busy until “business as usual” resumes:
Rates on savings accounts might go up, but they won’t jump overnight, and increases wouldn’t be significant. Banks consider many factors when setting savings rates, and a Fed rate increase doesn’t play a huge role in those decisions. Still, a bank typically will look at how its competitors respond to a Fed increase, and if other financial institutions keep savings rates low, it won’t have much incentive to increase its own rates. But if banks start raising their rates, others will likely feel compelled to do the same to stay competitive.
It’s probably best to keep your expectations low. When the Fed announced its hike in December 2015, many of the biggest banks reacted in the same way: They raised loan rates and left savings rates unchanged. This boosted banks’ margins.
Standard CDs will be affected in much the same way that savings accounts will: Rates might go up over time, but not by a lot. Keep in mind that most standard CDs come with fixed interest rates, so even if your bank’s rates do go up, your CDs’ annual percentage yields won’t change.
Some banks, however, offer bump-up CDs that let customers request a rate increase if the bank’s rates rise. In most cases, customers can exercise this option only once during a CD’s term. These types of CDs usually have lower interest rates than fixed-rate certificates, and many have higher deposit requirements. Still, if you have one, keep track of your bank’s rates. If they go up, ask your financial institution to adjust your CD accordingly.
Probably. Interest rates on credit cards typically rise or fall with the prime rate, which is directly affected by the Fed’s action. When the Fed boosted rates by 0.25 percentage point in December 2015, most major issuers raised the annual percentage rates on their cards by an equal amount within a month or so. If your rate is going up, you might not even hear about it from your credit card company. Although card issuers usually have to give you 45 days’ notice of an increase in your APR, there’s an exception for increases triggered by a change in the prime rate. So keep an eye on the APRs listed on your credit card statement.
A higher APR on your credit card means it will cost more to carry debt, although how much more depends on your balance. Your APR is a factor in how your minimum payment is calculated, so that could go up as well. Regardless of the effect in dollar terms, reducing your credit card debt is always a wise move.
Thirty-year fixed mortgage rates rose more than half a point (0.50%) in the four weeks following the election of Donald Trump, according to the NerdWallet Mortgage Rate Index. As of mid-March, 30-year fixed rates are topping 4.5%. Considering a $300,000, 30-year fixed rate mortgage, each half-point increase adds close to $100 a month to your payment.
So, that’s already happened.
With the Fed expected to raise rates twice more this year, mortgage rates may have as much as another half point to go. That would put home loan interest rates just under 5% by the end of 2017. Refinance activity has already taken a hit, as rates have climbed to their highest levels since July 2015.
And that’s before Republicans begin implementing their stated agenda to reduce the government’s role in the mortgage market. Those moves could also cause mortgage rates to edge higher, though it might be some time before the Trump administration gets around to its mortgage market reform.
Buying a home depends on so many different factors — how much house you can afford, mortgage rates and home prices in your area. Of course, there are also your family’s needs, your job situation, the down payment and the rest.
It’s hard to time all of that perfectly. But here’s the thing: If you’re all set to buy, don’t let moderately higher mortgage rates worry you. Proceed according to your plan. While the long-term outlook seems to indicate steadily rising interest rates, we’re building on very low ground. You know that whole “historically low mortgage rates” thing you’ve heard for the past few years? Yeah, we’re still there.
It will take a long climb higher before mortgage rates are back to their 44-year historical average of 8%. In the meantime, you’ll be in the money with a 4% or 5% home loan. Even a 6% mortgage is a significant discount to the average.
Yes, your buying power can be affected by higher interest rates, but that can also be offset by the better wages and greater employment opportunities of an improving economy.
Dayana Yochim, Tony Armstrong and Hal Bundrick are staff writers at NerdWallet, a personal finance website. Email: email@example.com or firstname.lastname@example.org or email@example.com. Twitter: @DayanaYochim or @tonystrongarm or @halmbundrick.
Updated March 15, 2017.