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Financial Articles from Hefren-Tillotson

Three Ways the Fed’s Rate Hike Affects Your Finances

Written by
December 16, 2015

As was widely expected, the Federal Reserve raised interest rates today, increasing its benchmark rate from 0.0% to a range of 0.25-0.50%. It was the first rate hike since 2006.

CaptureHow does the Fed’s action affect your financial situation?

It may cost more to borrow — The rate of interest charged on many loans is determined by the LIBOR or Prime rates, both of which are influenced by the Fed. Rates on loan products such as credit cards and auto loan could increase modestly.

Don’t expect borrowing costs to soar, however. Interest rates remain historically low and the Fed has signaled its intention to raise rates gradually.

Likewise, not all rates will go up. Many loans, including many home mortgage loans, are influenced very little by the Fed.

Interest rates on savings vehicles could rise — Rates on short-term savings vehicles such money market funds, CD’s, and checking accounts are affected by Fed policy. Zero percent interest rates have been the norm in recent years. That may change.

Don’t expect a windfall, however. According to a study in the The Wall Street Journal, banks historically have raised rates on loans faster than they have on deposits. Indeed, it may be years before savings vehicles offer solid returns.

Don’t Sweat Your Portfolio — The Fed has been raising and lowering rates for many decades. It is a normal part of economic and market functioning. Over the past year, the Fed has been clear in its intention to raise interest rates. Few investors should be surprised by todays outcome.

Looking ahead, the main wildcard for the Fed is inflation. In the past, the Fed has indeed caused financial market volatility as it raised rates rapidly in order to slow the economy and tamp down inflation. Today, inflation is near generational lows. Continued low inflation gives the Fed flexibility to adjust policy in an appropriate manner.

Bottom line: Today’s action by the Federal Reserve has garnered a lot of media attention. However, for most individuals who are saving, borrowing, and investing the bottom line impact to your finances is modest.