This month the Federal Reserve decided to raise the federal funds rate for the first time in 2017. This increases the federal funds rate (interest rate) by a quarter percentage point to a range between .75% and 1%.
What does this increase mean for the average consumer? Here is the quick FAQ.
Who is the Federal Reserve?
The Federal Reserve System is the central banking system in the United States, sometimes called “the Fed”. The Federal Reserve was created in 1913 as a means of providing regulation and policy around the United States monetary banking system. The Federal Reserve is comprised of 12 regional banks. Among many things, the Fed sets the interest rate that is charged between the regional and commercial financial institutions. Inevitably these rates will trickle down and impact consumers.
Why did the Federal Reserve Increase the Interest Rate?
One of the primary reasons the Federal Reserve increases interest rates is due to the concern for a spike in inflation as the economy grows. The result of any economic growth is inflation, however, if the economy grows to fast inflation can outpace the benefits of the economic growth. In general, economic indicators over the course of the last year have shown the economy growing at a consistent and healthy rate. By raising the interest rate, the Federal Reserve is looking to slow the growth to a healthy pace and manage inflation.
Will the Federal Reserve Hike in the Interest Rate affect my Home Mortgage?
In general, no. If you currently have a fixed rate mortgage there should be no impact on your current interest rate. However, if you have an adjustable rate mortgage you may want to consider moving to a fixed rate. Federal Reserve interest rate adjustments will impact adjustable rate mortgages.
In addition, if you are considering the purchase of a new home, you may want to start shopping sooner rather than later, expect home mortgage rates to rise.
Will the Rate Hike affect my Car Loan or Student Loan?
If you have a fixed rate vehicle loan your loan will not be impacted. In addition, student loans that are locked in will not be impacted. However, the cost of future vehicle loans and student loans will likely go up.
What about my Credit Cards?
Like adjustable rate mortgages, expect your credit card interest rate to go up. In some cases it could be as quickly as one month.
So, what is the most Important aspect of the Federal Reserve Rate Hike?
A rate hike by the Federal Reserve is an external force.
In my eBook Filling The Pig – In 4 Steps, I talk about external forces being a key contributor to staying in debt. External forces like the Federal Reserve rate increase are forces we can’t directly control, but have a direct impact on our personal finances.
The rate increase will impact borrowers before savers. It is anticipated, if the economy continues to grow there will be additional rate hikes in the future. If you use credit, or are currently struggling with debt, expect things to get a bit more expensive.
But, if you can manage to pay off debt and save money – cash, you can manage your own personal finances and not be influenced by external forces like a Federal Reserve rate increase. The lesson. Take control of your personal finances and in the future you won’t care what the Federal Reserve does or doesn’t do with the interest rate.