The era of cheap money isn’t exactly over, but on Wednesday, after seven years of having near zero interest rates, the Federal Reserve voted to raise the central bank’s benchmark interest rate from a range of 0 percent to 0.25 percent to a range of 0.25 percent to 0.5 percent. Economists have largely seen this as a positive development — it means the American economy is considered strong enough to handle higher interest rates — but, of course, the all-important question on everyone’s minds is likely: What does this mean for me?
It depends, of course, on where you’re putting your money these days.
Homebuying. While it’s expected that the minor interest rate hike will result in it being more costly to borrow money to buy a home, that isn’t necessarily the case. Numerous factors influence mortgage rates, from where in the country your home is located to the state of the global economy to whether inflation is believed to be around the corner. Still, there’s a pretty fair chance that the interest rate hike will lead to higher borrowing costs.
But it’s worth remembering that even if the rates go up, it’s still cheap to buy a house compared to the recent past. According to Freddie Mac’s website, the average 30-year fixed-rate mortgage currently stands at 3.94 percent. If you bought a house, say, 15 years ago, the annual average rate in 2000 was 8.05 percent.
David Reiss, a law professor at Brooklyn Law School who specializes in real estate, says he wouldn’t rush out to buy a home based on the Fed’s announcement.
“I would caution strongly against letting the Fed’s actions on the interest rate influence the home-buying decision all that much, no matter what market you live in,” Reiss says. “First of all, the mortgage market has taken the Fed’s likely actions into account already, so interest rates … incorporate some of the rise in rate already.”
Bottom line, he says: “Generally, people should be buying a home when it makes sense for their lifestyle. Expect to stay put for a while? Maybe you should buy a home. Expecting kids? Maybe you should buy a home. Retiring to a warmer clime? Maybe you should buy a home.”
Again, the interest rate climbed 0.25 percent, and while the Fed has indicated that rates may continue to rise, Federal Reserve Chair Janet Yellen has stressed that any future hikes will be gradual.
“Small changes in interest rates do not generally make that much of a dollars-and-cents difference in the decision to buy,” Reiss says.
Saving. Shortly after the Fed’s announcement, the American Bankers Association released a statement that read in part: “After years at historically low levels, it’s important to head back in the direction of more normal interest rates. Abnormally low rates can have adverse consequences — especially for savers that may seek out investments that could be too risky in pursuit of a higher return.”
Technically, the rate hike is great news for investors. A higher interest rate means that if you’re putting money in a savings account, you’ll end up making more money in interest. But a quarter-point interest rate isn’t going to make you wildly rich overnight, and many experts have already been cautioning that profit-hungry banks may take their time raising yields on savings accounts.
Still, Leslie Tayne, a New York City financial attorney and author of “Life & Debt,” says she wouldn’t waste any time not saving money.
“In light of the anticipated interest rate increase, consumers should consider opening up a savings account for the upcoming year or continue saving,” she says. “They should make it a point to put away money such as bonuses, holiday money or birthday money into a separate fund.”
Loans. The interest rate hike certainly isn’t good news for anyone borrowing money, but as noted, it’s still inexpensive to borrow cash — just a little less so — and you won’t likely notice much, or any, change in most of your loans, according to Sean McQuay, a credit card associate at the financial site NerdWallet.
“A rate hike will mean higher earnings on savings and higher interest charges on loans. However, expected changes have already been accounted for in most loans. As a result, mortgage, student and auto loan rates should remain largely the same,” McQuay says.
It isn’t all good news, however.
“Credit cards are the standout category where we can expect interest rates to rise, but we estimate the impact to be relatively small,” McQuay says, adding that NerdWallet’s findings indicate that with the new interest rate hike, “the average indebted American household can expect to spend only an additional $125 in credit card interest over the next five years.”
Investing. While the stock market has enjoyed the near-zero interest rates and has been one of the success stories of the past several years, investors were anxiously awaiting the Fed’s announcement of the interest rate hike. There has been a lot of speculation that the higher interest rates might end Wall Street’s party.
On the other hand, the Fed telegraphed the rate increase enough that if the hike hadn’t happened on Wednesday, it’s easy to imagine that news might have rattled investors as well.
Robert Johnson, president and CEO of The American College of Financial Services in Bryn Mawr, Pennsylvania, thinks investors shouldn’t be rattled but simply adjust to the new environment. For instance, he suggests considering investing in stocks that perform well in rising-rate environments.
“While it is true that stocks in general do much better when interest rates are falling than when rates are rising, some sectors perform much better when rates are rising,” Johnson says. “During falling-rate environments, consumer-discretionary industries such as apparel, retail, automobiles and durable goods are top performers. When interest rates are rising and monetary policy is tighter, defensive industries such as food, energy and utilities have done better than others. This is somewhat intuitive as people [still] need to eat, drive their cars and heat their homes in rising-rate environments.”
In short, Yvette Butler, president of Capital One Investing, has good advice for any consumers rattled by the interest rate, whether they’re investors, homebuyers or simply folks trying to climb out of debt.
She points out, as so many have, that the rate increase may be a sign of a healthy economy. But the bottom line is that you shouldn’t fear what the interest rate hike may do to your bottom line.
“Stick to your long-term strategies and avoid fear-based decisions that could skew your progress,” Butler advises.
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A Consumer’s Guide to the Fed Interest Rate Hike originally appeared on usnews.com
