At the Federal Reserve's January meeting on Wednesday, it signaled plans to change its monetary policy and raise interest rates in March to combat rising inflation.
The central bank elected to hold the federal funds rate at its target range of 0% to 0.25% for February, keeping interest rates low for now as it ends its asset purchases. But inflation increased by 7% annually in December, the highest increase in 40 years, so the Federal Open Market Committee (FOMC) will soon begin interest rate hikes in an effort to bring it back down.
"Today’s clear signal from the Federal Reserve that they will hike rates in March was no surprise, given the strong job market and inflation well above the 2% target," Mike Fratantoni, Mortgage Bankers Association (MBA) senior vice president and chief economist, said. "Similarly, the Fed’s move to quickly end any further growth to their balance sheet, thereby reducing accommodation at the longer end of the yield curve, also makes sense given the evolution of the economy."
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Fed’s rate hike likely to hit credit cards and adjustable-rate loans first
As the Fed begins to raise rates, borrowers with credit cards and adjustable-rate loans or other short-term interest rates that change with market conditions will be affected first, one expert explained.
"Higher interest rates will likely affect borrowers’ credit card balances and any adjustable-rate loans first before they trickle into other loan types," Kent Lugrand, InTouch Credit Union president and CEO, said. "If the Federal Reserve makes its first move to raise short-term rates at its next policy meeting in mid-March, customers should expect to see it reflected on balances for new purchases in April or May.
"To help alleviate any future ‘pocketbook pain’, borrowers should start paying down any high-cost credit card debt now, or look into transferring the balance to a lower-interest option," Lugrand said.
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Lugrand also warned that homeowners with adjustable-rate mortgages could also be affected by the Fed’s decision to raise rates.
"This Fed rate increase ‘signal’ will also eventually impact adjustable-rate mortgages by potentially causing monthly payments to increase," he said. "Borrowers should consider shopping around and refinancing if they have an adjustable or variable-rate mortgage that's already stretching their budget."
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The upside to higher interest rates
While interest rates could be going up soon, there is a positive side to rising rates – savings accounts.
"One positive of higher rates, while it does mean increased borrowing costs, a rate hike also means potentially higher rates of interest paid on savings deposits and other accounts that pay dividends," Lugrand said.
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