What a Possible Fed Rate Hike Means for You
(ABC News) – Top Federal Reserve officials are meeting in Washington, D.C., today for a two-day meeting, where they will discuss and decide whether or not to raise interest rates.
The Federal Reserve holds regular meetings like this, but expectations have been building in recent months for the Fed (as it is commonly called) to raise rates.
It last did so in December for the first time in almost a decade. Before that, the last time the Fed raised rates was June 2006.
We won’t know until tomorrow what the officials will decide to do, but in the meantime, here’s what a rate hike will mean for you and your wallet.
Your Mortgage, Credit Cards and Line of Credit
“Interest rates are all connected,” said Dean Croushore, a professor of economics at the University of Richmond and former vice president of the Federal Reserve Bank of Philadelphia. “So if the Fed increases its target for the federal funds interest rate at this meeting, it could have an impact on all types of interest rates.”
And many of those are the rates connected to loans you may have.
When the Fed bumps its rate, “credit cards, home equity lines of credit, and adjustable rate mortgages become more expensive,” according to Greg McBride, chief financial analyst at Bankrate.com, a personal finance website.
But these changes won’t happen quickly, and the Fed almost certainly won’t raise rates quickly.
When it raised rates in December, it did so only by a quarter of a point.
“A single quarter-point rate hike will have an inconsequential effect on the household budget, but the cumulative effect of a series of rate hikes over a couple of years could have a more meaningful impact,” McBride said.
In the short term, you’re likely to be fine, however.
According to McBride, “Mortgage rates will still finish the year lower than where they started even if the Federal Reserve raises interest rates.”
That’s largely because of economic conditions in some other parts of the world, which have led central banks in some cases to push interest rates into negative territory (effectively paying people to borrow) while economic growth is slow and inflation is low, McBride said.
Your Student Loan
The effect on your student loan will largely depend on where that loan is from.
If — like the majority of people — you’re the holder of a fixed-rate federal loan, whatever happens tomorrow, you won’t be affected, according to Max Spiegel, chief operating officer at Student Loan Hero, a website dedicated to helping students understand their loans. The same applies for those who hold a fixed-rate private loan.
But, Spiegel said, if you have a federal or private loan that is variable-rate you’ll want to pay attention, as any increase will cause your rate to increase “accordingly.”
“If you do have an existing variable rate loan, there’s no need to panic. Rates are expected to go up, but gradually,” Spiegel said.
The Fed’s decision will likely have an effect on the stock market — at least in the short term.
“The stock market might decline a bit on the Fed’s announcement,” Croushore said.
But there are so many other factors at play that the Fed’s decision should not have a lasting effect. Plus, there is a whole lot more that could shift the stock market in the coming weeks.
“Markets hate uncertainty, and whether it is the election or the an increase in interest rates, there is ample reason for stock market volatility in the next few months,” McBride said.
Finally, the interest rates can have an effect on currency exchange rates.
“The impact on the currency depends more on expectations about the future than on the impact of this meeting,” according to Croushore.
It isn’t exactly clear how the dollar’s exchange rate against other currencies will be affected by tomorrow’s decision.
According to the St. Louis Federal Reserve Bank, economic theory predicts that “a rate hike in the U.S. should depreciate the U.S. dollar.”
However, beginning in the middle of 2014, the “dollar’s value increased by more than 20 percent within nine months,” and that “appreciation corresponds with the lead-up to the Federal Open Market Committee’s first interest rate hike in nearly a decade.” (That hike eventually happened in December.)
But at the end of the day, you needn’t fret.
“A Fed [rate hike] at this meeting is unlikely to have an appreciable effect on the value of the dollar unless the Fed signals that it is is likely to raise rates faster than people currently expect,” Croushore said.
If does signal that it will raise rates faster than expected, according to Croushore, then expect the dollar to become stronger against other currencies.
However, if it signals that it won’t raise rates as quickly as investors expect, then Croushore said that the dollar could become weaker.
ABC News’ Susanna Kim and Morgan Korn contributed to this report, as did The Associated Press.