Why Not to Panic Over Rising Interest Rates

For more than a year, the business press and Wall Street have been constantly consumed with the question of when the Federal Reserve Board is going to raise interest rates. Now comes the release of minutes from the Fed’s July meeting and, lo and behold, the central bank is nearly ready — again — to raise rates.

From everything that is written, you would think that bumping up the main interest rate of the U.S. central bank would be the kind of world-changing event that would move mountains, change tides and bring back the leisure suit. But for most consumers, the coming hike of the Fed’s discount rate will be about as momentous as brushing your teeth.

This is because absolutely no one is going to be surprised by the move. The Fed has kept its main interest rate at zero for all practical purposes for seven years. That means that logically there is only one direction that interest rates can go, and anyone who pays attention to such things knows that. Besides, the Fed has signaled its intent to eventually raise rates by using everything short of sending Chairwoman Janet Yellen out with semaphore flags.

That means that the eventual hike already is priced into long-term rates, such as thirty-year mortgages, which at about four percent, remain at near-historic lows. That tells us that the coming rate hike is not going to be all that drastic, and certainly won’t give consumers any big wallop.

In fact, the first hike the Fed is likely to make, either in September or sometime before the end of the first quarter of next year, is a whopping quarter of one basis point: 0.0025 percent.

So while day-traders and the rest of Wall Street are freaking out to chase this obvious eventuality, the average borrower does not have a lot to worry about. The fact is, interest rates will be going up, and the cost of borrowing will, subsequently increase. The Fed is not going to stop at just one quarter-point rate hike, though, which all means the low rates we have gotten used to since the Great Recession hit will be coming to an end in the next year or so.

In the meantime, the best move consumers can make is to lock in low rates now, consider your future borrowing needs, and refinance any current debt to keep low rates working for you even as they head up.

Refinance your home - If you had trouble before, lenders have loosened up a bit. Check your credit score and start shopping. Low rates mean you can even shorten the term of your home loan and save more. You can start here.
Cut your credit cards - With good credit, you can get a zero percent rate for up to eighteen months with some offers. Or just call your issuer and ask if you can get a better rate.
Lock in home equity - An equity line of credit at a low rate is useful for emergencies, or provides a cheaper way to finance other purchases. A line of credit can be used to refinance other debt, and interest is tax deductible.
Rev up a car loan - Low rates on car loans, especially at credit unions, make this a good time to buy. Credit unions also will refinance a car loan, if you are paying too much. Low rates have made leases attractive as well, so check out those deals.
Savers will have to wait - A small move from the Fed may nudge rates on savings accounts, money markets and certificates of deposit, but probably not much. Savers cannot expect any big boost to returns on their accounts in the near future.