The Fed – you know, that illustrious American institution officially known as the Federal Reserve – looked for three interest rate hikes in 2018 during its last forecast round in December 2017. On March 21, 2018, Jerome Powell, the new Fed Chairman, chaired his first FOMC meeting. The Fed decided to hike the rate to a new benchmark funds rate at a target of 1.5% to 1.75%. (For more, see The Impact of the Fed Interest Rate Hike.)
The Interest Rate Hike: A Good Thing?
Such an increase can be interpreted as a positive sign about the brisk growth of the U.S. economy, as officials at the Fed would likely not take such an action during a slide into recession. After all, when the American economy hit bottom in the Great Recession, interest rates were cut to zero for the first time in history.
What does this mean for American workers and consumers? While this kind of increase may not seem dramatic, it’s the cumulative impact over several areas of your financial life that you’ll want to consider.
If you have zero debts and aren’t in the market to buy a new home, you might expect that an interest rate hike promises good news for your savings account. Unfortunately, many of the large institutions in the U.S. pay low savings interest rates, just at 0.01%, and this number is not expected to rise. Check online savings accounts and credit unions, which may be quicker to extend the Fed’s higher interest rate to their customers.
Your Credit Cards
Credit cards are by nature fickle beasts, with adjustable rates that vary on the market’s ups and downs. While it may seem easy to do the math on how this rate hike impacts consumer debt, the long-term impact may be greater than consumers initially expect. After all, it doesn’t sound too bad to pay an extra $5.00 a year on every $100 you carry in credit card debt because of rate increases. Yet for a consumer who owes $10,000, that pocket change quickly turns into a yearly $500 increase, and that isn’t chump change. For many Americans it may be time to write, “Pay off credit cards” at the top of their list of New Year’s resolutions.
If you have an adjustable-rate mortgage (ARM), you may have long been dreading an interest rate increase. Rather than allowing your mortgage rate and anxiety levels to be subject to market fluctuations, it might be a great time to think about refinancing: Average fixed-rate loans are currently sitting at just over 4.5% for typical 30-year mortgages. Converting to a fixed-rate option may be especially appealing to homeowners with home equity lines of credit (HELOCs), who can expect to see immediate increases in their monthly bills.
Your Student Loans
The interest rate on federal student loans experienced a hike last year. Undergraduate loans rose to 4.45% from 3.76% on July 1, 2017 and will stay at this level for one year; grad students went to 6% for a direct unsubsidized loan from 5.31%. Direct PLUS loans, used by both grad students and parents, increased to 7% from 6.31%. An Introduction to Student Loans and the FAFSA will get you started on understanding this program.
The federal government carries more than 90% of student loan debt, which adds up to nearly $1.4 trillion. To put that number in perspective, it’s roughly the same as the gross domestic product of South Korea in 2016, one of the world’s most prosperous nations.
Fortunately, the rate hike actually won’t impact most Americans who currently carry student loans. That’s because federally backed student loans are fixed-rate ones. Of course, if you’re matriculating at Princeton in September 2017 and plan to borrow money to cover the yearly $45,320 tuition, your future loans will fall into the new interest rate territory. If you carry adjustable-rate private student loans, you may want to refinance to avoid possible multiple rate hikes over the next few years. (For more, see Student Loan Debt: What Every Borrower Should Know.)
Your Car Loan
If you’ve decided that 2018 is the perfect time to spring for that new car you’ve been eyeing, don’t fret. This rate hike won’t kill your dream, whether you favor Ferraris or Fords. A half-point increase amounts to not that many dollars a month – about the price of a couple of cappuccinos – on an average car loan, which currently clocks in at around $30,000. These days most five-year loans hover at just under 5% annual interest, while interest rates on four-year loans are currently at around 4.5%.
The Bottom Line
The Fed’s interest rate hike may be a sign that the economy is finally growing well – and that’s a good thing. However, if you fall into the camp of those with multiple debts, from mortgages to car loans to college debt, as many Americans do, pay close attention to the impact it might have on your financial well-being across several categories.