Dollars and Sense: Fed Reserve signals more rate increases

This past week the Federal Reserve (Fed) raised interest rates a quarter of a percentage point. This was the first rate increase by the Fed, since late last year.

This move was widely anticipated, as the Fed at its previous meeting did signal a strong likelihood for a rate increase. What was new information, was that the Fed mentioned the likelihood of 3 further rate increases for 2017. Previous commentary by the Fed was for two rate increases for next year.

It should be noted that the expectations that the Fed is establishing can easily be changed. In other words the three rate increases being established for next year is a base forecast, when in actuality we could easily see more or less than the 3 rate changes.

There are several reasons why the Fed wants to raise interest rates further. The economy, while certainly not robust, has been performing somewhat better recently, with unemployment at a low level. Inflation is also starting to increase at a little faster pace.

What also needs to be noted is that interest rates are still at unusually low levels. Because interest rates have been so low for so long some people might think of the current rate structure, as being normal, when in fact it is not. The Fed mentioned that they see the longer term base rate for short term interest rates being 3%. That is far above the current rate of .5% to.75%.

This is not to imply that interest rates are going to 3% any time soon. However, if the economy performs reasonably well over the next several years having interest rates rise to that level would not be too surprising.

This quarter point move by the Fed obviously is not that significant for consumers. However, to the extent that we have a series of these moves over the next year, then the significance becomes much greater.

Loans that are short term in nature are directly impacted when the prime rate changes. The most significant ones being impacted would be home equity loans, short term business loans, and credit card borrowings.

Auto loans are somewhat impacted, when the Fed raises interest rates. Auto loan rates will certainly be going up, but not necessarily at the same pace of other short term loans.

Mortgage loans are directly impacted, if someone has a variable rate mortgage. Fixed rate mortgage loans are tied to changes in longer term interest rates. These rates have risen at a faster pace over the past month than the recent quarter point move by the Fed. While fixed rate mortgage loans may move higher, they will not necessarily change with further moves by the Fed.

For people with significant savings the increase in rates would normally be considered good news. People who have CD’s, money market or savings accounts are acutely aware that their savings have been earning virtually nothing in recent years.

When the Fed is just starting to raise interest rates many financial institutions are slow about increasing deposit rates. Therefore, many savers may not see much in the way of rate increases for a period of time. For those with large balances it could be worthwhile to compare rates at different institutions, if one’s bank is overly stingy about increasing their deposit rates.

Whether one is a saver, or a borrower, this period of extraordinarily low rates appears to finally be coming to an end. Therefore, if you are looking for an auto or home loan, realize that the very low rate that was available several months ago is not coming back any time soon. If anything, loan rates will likely go higher from where they are now. Likewise a saver may not see much benefit right away, but over the next year should finally start to obtain some noticeable interest income.