The Federal Reserve raised its key short-term interest rate this week as U.S. economic growth remains strong and unemployment is at an 18-year low. The bottom line for borrowers is this: everything from credit cards to auto loans to mortgages is about to become more expensive because of this Fed rate hike.
The Fed’s monetary policymakers added another quarter-point to the central bank’s key interest rate, putting it at 1.75% to 2%, the highest since 2008, economists said. This is the second of a now planned four interest rate increases expected for this year. The Fed last raised its benchmark rate a quarter-point in March, moving it into the range of 1.5% to 1.75%. You’re going to feel this one right away.
If You Have Debt, You May Need Some First Aid
The most immediate effect for consumers will appear in the form of higher interest rates on credit cards, home equity lines of credit, and adjustable rate mortgages. The average credit card now charges a record-high 17%, and that will climb further, something that can be really painful. The average credit card debt is now over $6,000 per person and total credit card debt is now at an all-time record of over $1 trillion according to the Federal Reserve. This additional rise in rates will add another $1.6 billion of debt to the already record number!
Your best way to deal with high interest rates is to ask your card or loan holder for a better rate or try to seek out some other company by shopping around and looking for a better deal from someplace else. According to a recent study by CompareCards.com, only 25% of credit card holders have requested a lower APR on one of their credit cards, yet 64% of those who asked actually received a lower rate. On average, they reduced their rate by 5.5%. It never hurts to ask!
How Bad Can It Get for Borrowers?
Taking on credit card debt or taking on any “unnecessary” debt is never a good idea, especially when magnified by the interest rates on the rise. In case you need a reminder of what can and does sometimes occur, back in the early 1980’s, interest rates broke records and changed lives and not in a good way! Imagine paying over 18% interest on a 30-year fixed mortgage. It’s almost unthinkable. But that was the reality for home buyers in October 1981—a year when the average mortgage rate was almost 17%.
Unlike today, in the early 1980’s, the Federal Reserve was waging a real war with inflation. In an effort to tame double-digit inflation, the central bank drove interest rates higher and as a result, mortgage rates topped out at 18.45%!
For borrowers with adjustable-rate mortgages, the effects of the current Fed rate hike could be just as dramatic. If your variable-rate mortgage only adjusts once a year, and there are four interest rate hikes this year, borrowers should hang on to something because their monthly payment increases might deliver a knockout blow! You may be able to convert your adjustable-rate mortgage to a fixed-rate mortgage, but you’d be better be quick.
Rates on new mortgages and car loans will also be going up, resulting in higher monthly payments than before. Fixed rates have been on the rise for a while before this increase, with the benchmark 30-year mortgage rate recently hitting a seven-year high of 4.8% during the week of May 23rd before slightly retreating.
What Does It Mean for Savers?
On the other hand, rates on interest-bearing instruments like savings and checking accounts will tick up a bit and that will benefit anyone who can actually save some of their money.
But even with saving rates going up, savers can’t sit back and wait for improving returns to come rolling in to them. Savers need to aggressively pursue the banks and credit unions with the best rates and that means really paying some attention to them.
The best savings account rate is right now 2.05% and that is almost 23 times the national average of just 0.09%, according to Bankrate.com.
Why are the Fed Rates Going Up Anyway?
The Fed’s latest rate actions are a result of its dual mandate to keep inflation in check and to optimize employment. Unemployment has been steadily declining reaching 3.8% in May 2018. U.S. economic growth is expected to be in the range of a robust 4.1% to 4.5% in the second quarter, according to notes by the Federal Reserve Bank of Atlanta and the independent research firm Macroeconomic Advisers.
But, the strong economy is causing an increase in demand for resources, a moderate rise in wages and non-labor costs, and heightened inflationary fears, so the Fed raises interest rates on order to cool down the economy and keep prices in check. Right now, the inflation rate is above the 2.0% that the Fed had projected the annual 2018 rate would run. And that has them worried.
The current inflation rate is 2.5% for the 12 months ended April 2018, according to the U.S. Labor Department. The Fed inflation target of 2.0% is anticipated to be over that for a period of time, perhaps into next year.
What Will Be the Market’s Reaction?
The stock market already factored in the rate increase and shouldn’t have a strong reaction from the Fed’s decision this week. The market expected the June rate hike and is expecting more rate increases this year.
The price of money is rising, and as it continues to rise it will buffet financial markets according to most leading economists. Their advice is that investors should stick with their current investment strategy.
Cutting Expenses and Increasing Income
Unless you’re part of the “one percent”, you can’t sit around and just hope that things will improve. I am always in favor of being more frugal or at least not wasting my money and being totally aware of what I have and where it’s going. You need to be too. Does the phrase “affordable budget” ring any bells? But when inflation is up and you have big debt, it becomes like oxygen to your body to insure you financially survive.
If you don’t know what you have coming in each month, find out. If you don’t track your expenses and budget accordingly, start doing it right away. If you are slipping further and further into debt, consider all of your alternatives from cutting out unnecessary expenses to taking on a side hustle or part-time second job. Whatever it takes to weather the storm is what you need to do right now, before that knockout punch comes.
The economic cycles always fluctuate and go around in circles. What happened in 1981, can and will happen someday again. The prosperity of the 1990’s will also come around too; it’s just that we never really know when and why. If we did know all of the reasons and ways to keep the “financial seas” calm, don’t you think it always would be that way?
What are your concerns about inflation and interest rates? Are you in debt and will you be able to weather any financial storm ahead? Are you frugal and know where your money is and where you’re heading or is it time to wake up and do something right now to prevent a knockout punch for you and yours? Are you prepared for more Fed rate hikes in the future?