U.S. economic activity bounced back in October after taking a hurricane-induced hit in September, raising the odds of a Fed rate hike before the end of 2017.
The Federal Reserve kept interest rates unchanged at its FOMC meeting last week but is likely to raise rates in December after the Labor Department reported the largest gain in payrolls in two years while the unemployment rate dipped to 4.1% — matching the lowest level since 2000.
In addition, the Commerce Department said last week U.S. consumer spending saw its biggest increase in more than eight years for September.
The increase in both jobs and spending likely stemmed from a rebound in states affected by Hurricanes Harvey and Irma. Displaced workers returned to their jobs and money was spent to replace and repair storm-damaged cars and homes. The Commerce Department reported that durable goods were up 3.2% percent in September and a 14.7% spending increase for new cars.
Why should you care about a fed rate hike?
A rate increase next month would be the third in 2017. And while rates are still historically low, any Federal Reserve rate hike will impact consumers as rates on mortgages, credit cards, auto loans and myriad other products are directly linked to the fed funds rate. If you have any loans or credit cards with a variable (vs. a fixed) rate, the impact could be more significant.
“The impact for borrowers is more the combined increase over the term of the loan, particularly for mortgages, as a $25 increase per month over 30 years can add up to $9000 over the life of the loan,” says Kelley Motley, Experian director of analytics. “The bigger deal, for monthly payments, is if there are two or three rate hikes in a year before a consumer has a rate reset.”
In that type of scenario a consumer’s mortgage payment could go up significantly.
Here are eight outcomes from higher rates that may impact your bottom line:
The Fed can indirectly impact the job market as they try to achieve higher employment rates. When the Fed raises the federal rate, it tends to slow the economy. That leads to fewer people being hired, which means workers also have less leverage to demand pay raises.
Mortgages and home equity lines of credit
Rising Fed rates can have a cascading impact throughout the economy, including housing. When the Federal Reserve raises rates, financial institutions are quick to respond by raising rates on new fixed-rate loans. A rate hike will impact consumers with an adjustable-rate mortgage (ARM) more than other borrowers.
“Whenever rates increase, homeowners have less incentive to refinance, reducing loan volumes and mortgage-lending jobs,” says John Tomko, Experian senior business consultant. But “purchase volumes can often go up to partially offset that decrease because consumers who have been considering buying will feel an increased sense of urgency to get in now before it’s too late.”
If rates go up from 4.0% to 4.5%, the payment on a new $300,000 30-year fixed rate loan will be about $88 per month higher.“Homeowners who have home equity lines of credit (HELOCs) will see an immediate increase in their monthly payment.
If a homeowner’s $30,000 5.0% HELOC goes up to 5.5%, their payment will increase by about $13” per month, Tomko says. “Coupled with increases from other borrowing, many homeowners choose to cut back on other spending and save less.”
If you were in the market to buy or refinance a home you may consider locking in a mortgage rate before the next Fed rate increase.
Any rate increase should have a minimal impact on car buyers says Melinda Zabritski, senior director for Experian Automotive. “Even a 1% increase only impacts an average car payment by around $13-$14 a month while a 0.5% increase adds an extra $7 to the monthly payment,” Zabritski says.
“Rates today are still, on average, nearly 1% lower than they were prior to the recession when there were record vehicle sales. Any increase in costs, whether it’s vehicle or rates, has the potential for more consumers to choose a longer-term loan like a 72-month loan.” (See also: 4 Car Shopping Hacks to Save Money)
Given the continued increase in outstanding credit card balances, a Fed rate hike could impact people that carry debt balances on their cards. Those variable rates credit cards feel the immediate impact from a hike in the Fed’s key short-term rate.
Alan Ikemura, senior product manager for Experian, says a change in the federal funds rate creates a domino effect with the prime rate and interest rates on credit cards following not far behind. Essentially any short-term interest rates will be impacted by a Fed rate hike, making rates and borrowing costs increase for the consumer.
Student loan debt is now $1.4 trillion in the United States as 13.4% of consumers have one or more student loans on file, according to Experian data. If your student loan is a federal loan, then Fed rate hike will not cause a change because those rates are fixed.
However, interest rates on Stafford loans prior to 2006 were probably variable interest rates based on whether you were still in school, in repayment or within the loan grace period. If this is the case then your rates may go up slightly with a hike.
There were 31.6 million existing personal loans in the second quarter of 2017, and 33% of those Americans that opened a personal loan carried other loan debt at the time, according to Experian.
“The price for new personal loans will increase as the money banks borrow becomes more expensive. Loans with a fixed rate, like a personal loan, will not increase the payment amount over the term of the loan, but loans opened after the rate increase will be more expensive,” says Brodie Oldham, Experian senior director of analytic consultancy.
When the Fed raises short-term rates, banks can charge a bit more for loans and in turn have more freedom to pay higher interest rates on deposits. How much depends on whether the Fed will keep raising rates and the next expected increase could just be 0.25%. Much of this depends on the economy’s performance but an increase could yield a positive outcome for savers.
What you pay for gas, groceries and goods can be indirectly tied back to the Fed’s decision on interest rates. The Fed wants to limit inflation by raising the federal funds rate, making money more expensive in order to reduce demand and slow the pace of price increases.
In short, inflation is the result of excess money chasing a limited supply of goods or services. By raising borrowing costs, the Fed attempts to limit the supply of money circulating in the economy, thereby reducing demand and limiting inflation.
A rate adjustment can mean different things for you and whether you should lock in a loan rate now or open a new credit card. Ahead of making any big decisions, make sure to assess how a rate adjustment might impact your financial situation.