How The Fed’s Rate Increase Will Impact Consumers

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Joanne Butler Contributor
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Are you considering refinancing your mortgage or buying a home or car this year?  Shopping for a sweet deal on a credit card with a low interest rate?  Taking out a loan to remodel your home?  If so, you may need move fast before interest rates are expected to go up next week and rise again later this year.

Federal Reserve Bank Chair Janet Yellen has been under considerable pressure to increase interest rates.  “Fed Watchers” – a group of fortune tellers who happen to wear expensive suits – predict the Federal Reserve will raise interest rates next week, with more rate hikes to follow.

No doubt, within moments of a rate hike announcement, your friendly banker or credit union will raise interest rates on every loan product they offer (including credit cards).

And, if the U.S. economy continues on an upward curve later this year, the Fed will raise interest rates again.

Why can the Federal Reserve do this?  Can’t Donald Trump stop them?  What do people mean when they talk about the Fed’s interest rate? Who benefits from higher interest rates anyway?

The answer to the first two questions is that the Federal Reserve is an independent agency.  One of its functions concerns bank-to-bank loan actions.  Its headquarters is in D.C., and it has regional Feds nationwide.

If President Trump disagrees with Chair Yellen, he can call or tweet about her, but that’s about it.

Interestingly, Yellen’s term as chair ends next year, but her tenure on the Fed’s Board of Governors ends in 2024.  Only one member of the Board has a term that will expire during this administration – Stanley Fisher’s expires on January 31, 2020.

Turning to the Fed’s ‘interest rate’ – this involves the Fed setting the rate by which Bank A can lend money to Bank B for overnight clearing purposes.

In simple terms, assume on Tuesday Bank B has more checks it must pay out than it has in ready cash.  To pay on those checks, Bank B borrows funds from Bank A, but only on an overnight basis, for by Wednesday, Bank B will have the cash to repay Bank A – plus interest (as set by the Fed).

This loan system may seem arcane, but it has a huge ripple effect, including interest rates on consumer loans.

On the flip side, people who have money in savings accounts, money market funds, etc., can expect an uptick in what they receive in interest payments.  As the overnight Fed interest rate propagates into higher consumer loan rates, banks and credit unions can afford to pay its savers a higher interest rate.

Putting aside the Fed’s machinations, what this means for the average American is that interest rates on mortgages, auto loans, and secured or unsecured loans likely will increase this year.

Next week’s expected rate hike might not have a major impact on consumer loan rates now.  However, if, as expected, the Fed continues to increase interest rates this year, the cumulative effect will be an October 2017 car loan that’s more expensive than a March 2017 one.  And those low- or no-interest credit cards could disappear too.

As the television pitchmen say: ‘This deal won’t last forever.’  Those current attractive interest rate deals might not last past next week.  If you’re seeking a low-rate consumer loan, get going now.