The Federal Reserve’s two-day meeting last week was tough to distinguish from most any of the nation’s central bankers’ meetings over the past nine years. There hasn’t been a rate hike since June of 2006, and Fed Chair Janet Yellen made it clear she doesn’t believe the economy is ready for one now. However, someday the Fed will raise rates and there will be big implications for consumers beyond your 401(k) or IRA.
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While pundits and stock analysts have focused on the impact of a rate hike on the stock market, interest rates consumers pay for on a variety of financial products will be impacted. Many banks set their prime interest rates based, at least partly, on the target level of the federal funds rate, which is established by the Federal Open Market Committee. Credit cards and home equity lines of credit, for example, are typically tied to the prime rate of interest. And, you can expect their levels to move in lockstep with Fed action. Currently, card interest rates are averaging 15.07%, according to CreditCards.com’s weekly rate report, while Bankrate.com reports the rate on the average $30,000 Home Equity Line of Credit (HELOC) at 4.59%. So, the good news this week is that there are no immediate or large hikes on the horizon for those two products.
However, mortgage rates, which currently are averaging 4.09%, have already been moving higher. Although they edged lower last week, they are up three-tenths of a percent since last April, according to Bankrate.com chief financial analyst Greg McBride, who says mortgage rates will continue to move ahead of the Fed. “By the time the Fed moves, mortgage rates will have long reflected it,” says McBride. For buyers, that has important implications because if the Fed were to engage in multiple hikes, rates could quickly make that fixer-upper you’re stretching to buy too expensive to purchase in the first place, much less renovate. On the other hand, the auto loan business remains so competitive that McBride says he doesn’t see rates on car loans moving higher quickly. If you are buying a car, shop around for the best rate.
I wish that I could report that rates for savers will quickly streak higher with any Fed action. Alas, that is not the case. “If the Fed moves gradually, your improve will come gradually,” McBride says. “And, not every institution will raise rates, so you’ll have to seek out top-yielding institutions.” Rates on certificates of deposit, for example, are notoriously slow to move. For the past 14 weeks, the average yield for a one-year CD was 0.27%, while the five-year yield was 0.86%.
Though the Fed decided not to move this week, you should be aware that most experts expect the central bank to tighten at their September meeting. Bottom line, if you are looking to finance a home, you’ll be better off moving quickly to lock in lower rates before that happens. In the meantime, savers are still suffering and the stock market continues to benefit from an inactive Federal Reserve.