As expected, interest rates are on the rise again. Federal Reserve Chairwoman Janet Yellen and the Federal Open Market Committee (FOMC) voted on March 15 to raise the Federal Funds target rate by 0.25%. This rate sets the basis for what banks charge other banks to borrow money, and it’s also a starting point for interest rates on consumer-facing products like credit cards and auto loans. The quarter-point hike sets the target rate between 0.75% and 1.00%.
To spur growth after the Great Recession, the FOMC kept rates near zero for seven years. In raising rates for only the third time since June 2006, the FOMC again cited improvements in the job market and inflation as reasons to raise rates now and gradually raise them over the coming years. “The simple message is the economy is doing well,” Chair Yellen said in a press conference after the announcement. “We have confidence in the robustness of the economy and its resilience to shocks.”
Interest rates deeply impact Main Street. Here are four of the most common ways rising rates could impact you.
Mortgages and vehicle loans – If it costs more money for banks to borrow money, it’s likely that extra cost will be passed on to the consumer. Whenever the Fed decides to hike interest rates, house hunters and car buyers should expect to pay a little more in interest down the road.
Bond values – Generally when interest rates rise, yields rise and the price of existing bonds fall on the resale market. If held to maturity, the full principal value of the bonds is returned (subject to the creditworthiness of the issuers).
Student loans – Most student loans issued by the federal government are tied to the 10-year Treasury note, a debt instrument issued by the U.S. Treasury department. Here too, higher interest rates mean you’ll pay more to borrow money for school.
Savings accounts and CDs – This is one area where higher interest rates are good news for consumers. When rates increase, you’ll eventually earn more interest on your savings. Interest rates on CDs are usually fixed at the time of purchase.
Contact your financial advisor for more information on how interest rates play a role in your investment portfolio.