Mar 7, 2017
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What a Fed Rate Hike in 2017 Means for Your Money

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In December 2016, the Fed raised interest rates for just the second time in a decade. Federal Reserve Chairperson Janet Yellen and the Federal Open Market Committee increased the target range for the federal funds rate from 0.5 to 0.75 percent.
The Committee's next meeting is March 14-15 and speculation on the Fed's decision is high. Yellen has been open about the need for future increases but unwilling to determine a specific Fed rate hike date.
“Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” Yellen said before the Committee on Banking, Housing and Urban Affairs on Feb. 14.
The Fed's decision indirectly influences many interest rates because it controls the federal funds rate — the interest rate that major banks and credit unions charge each other when lending money. Higher interest rates could impact your wa..

In December 2016, the Fed raised interest rates for just the second time in a decade. Federal Reserve Chairperson Janet Yellen and the Federal Open Market Committee increased the target range for the federal funds rate from 0.5 to 0.75 percent.

The Committee's next meeting is March 14-15 and speculation on the Fed's decision is high. Yellen has been open about the need for future increases but unwilling to determine a specific Fed rate hike date.

"Waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession," Yellen said before the Committee on Banking, Housing and Urban Affairs on Feb. 14.

The Fed's decision indirectly influences many interest rates because it controls the federal funds rate — the interest rate that major banks and credit unions charge each other when lending money. Higher interest rates could impact your wallet in a major way, so find out what to expect.

1. MORTGAGE RATES MIGHT RISE

The lasting impact of a Fed rate hike on mortgage interest rates remains unclear. Potentially, the initial Fed interest rate hike could raise rates on the long-term bonds used to set mortgage rates. Yet, 10-year Treasury bonds are also influenced by inflation expectations and the worldwide economic outlook. In the short term, adjustable-rate mortgages and home equity lines of credit would be more sensitive to a federal rate hike.

So, although it's impossible to say exactly how a rate hike will impact mortgage rates, it might be best to eliminate uncertainty. If you're seeking a new home mortgage or considering refinancing an existing mortgage in the near future, you might want to lock in a loan sooner rather than later.

Following the Fed rate increase in December 2016, rates for a conventional 30-year fixed rate mortgage ended at an average of 4.2 percent for the month. This is the highest monthly average since April 2014, according to Freddie Mac.

2. AUTO LOAN RATES COULD TREND HIGHER

The small rise in the federal funds rate shouldn't affect car buyers too much. U.S. automakers realized a record-breaking 2016, as automakers sold 17.6 million cars and light trucks. This marks a 0.4 percent increase in sales from the record set in 2015.

Should interest rates continue to rise, auto loan rates will likely follow suit. If the next Fed rate hike is small, it's unlikely consumers will be impacted in any significant fashion in the short term.

Dealers want to keep new cars moving, so they're motivated to continue offering incentives. In the long term, multiple Federal Reserve interest rate hikes could eventually take a noticeable toll, so if you're thinking of getting a new car in the next few years, keep a close watch on the outcome.

3. FED’S DECISION WON’T RAISE INTEREST RATES ON BANK DEPOSIT ACCOUNTS

A Fed rate announcement might sound like a great opportunity to collect higher interest payments on deposit accounts, but it doesn't work that way. Even with an interest rate hike from the Federal Reserve, you probably won't see higher interest rates on your checking and savings accounts. Despite the December 2016 rate increase, rates haven't really changed much.

Of course, there's always an exception to the rule. In December 2015, shortly after first federal rate hike, JPMorgan Chase & Co. announced an increase in deposit rates for select customers, but this was not the industry standard.

In general, when the Fed raises interest rates, savings rates rise at a slower rate than borrowing rates. Of course, if rates continue to increase in 2017, banks will need to raise interest rates on deposit accounts to remain competitive. If Fed rate hikes are instituted, shop around to ensure your bank is offering you a fair rate.

4. CREDIT CARD INTEREST RATES SHOULD NOT SPIKE

Credit card interest rates are variable and somewhat sensitive to hikes in the federal funds rate. As interest rates and consumer confidence go up, your credit card rate will follow. Don't expect a huge spike, however, as recent legislation prevents lenders from quickly hiking the rate on existing balances in most cases. If rates skyrocketed overnight, consumer spending would plummet — the exact opposite of what the Federal Reserve wants to happen.

Under the terms of the Credit CARD Act of 2009, issuers are typically barred from raising rates on existing balances unless you've missed two consecutive payments. They're also required to provide 45 days advance notice prior to increasing your interest rate on new purchases, allowing you time to cancel the account if you so desire. Unfortunately, credit cards with a variable interest rate are an exception to this rule, so if your card does not have a fixed rate, you might see an immediate increase.

5. STUDENT LOAN RATES WON’T SKYROCKET

If you're worried about the Fed's announcement because you're buried in student debt, don't panic: Your monthly payment might not rise at all. Federal student loan rates — Federal Perkins Loans, Direct Subsidized and Unsubsidized Loans, Direct PLUS Loans and Stafford Loans — are fixed, so the payment will remain the same until you've paid off your loan. This hasn't always been the case, though, so if you have a Stafford Loan that originated prior to the 2006-2007 school year, read the fine print to find out if it's fixed or variable.

Federal loans aren't the only way to pay for school, so if you have private loans, these could be attached to variable terms. You might consider your refinancing options for any variable student loans to see if a fixed rate will save you money in the long term. One rate hike won't drastically raise your variable student loan payments, but if the Fed continues to increase rates, your wallet could start to feel a bit lighter.

6. RETIREMENT PLANS COULD TAKE A TUMBLE WITH A FED RATE HIKE

Higher interest rates could have a negative effect on your retirement account — at least in the short term. Many factors play into the extent of the impact, including portfolio diversification and target retirement date.

Market volatility is common after a Fed rate hike, which can at least temporarily cause the value of stocks in your retirement portfolio to decline. Even fixed-income investments can take a hit, but some bonds react differently than others.

Certain types of bonds, such as high-quality corporate bonds and U.S. Treasury bonds, are more sensitive to rising interest rates than other investments, according to TIAA. On the other hand, the financial services company notes that equity markets have historically increased after rate increases, as it signals economic growth.

If you haven't reviewed your retirement portfolio in a while, take some time to analyze your asset allocation. Consider meeting with an advisor to go over your plan if this isn't your area of expertise.

This article was originally published on GOBankingRates.com.

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