What Does an Increase in the Federal Interest Rate Mean for Me?
On June 14, 2017, the Federal Reserve raised the federal interest rate for the fourth time since the 2008 financial crisis, bringing the rate up to 1.25%. The low rates of recent years were meant to stimulate the economy by encouraging consumers to buy major assets like houses and cars by lowering the cost of taking out mortgages and loans to help pay for them. The increased interest rate signals confidence in the stability of the economy by basically taking away the extra encouragement offered by lower interest.
Why is this Important?
An increase in the federal interest rate changes the way that consumers and businesses access credit. A higher federal interest rate means that financial institutions are charged more to borrow money, which is the amount that they have to pay out on things like savings accounts and share certificates (or CDs). Those extra costs get passed onto consumers in the form of higher interest rates charged for things like credit cards and loans.
These things will increase when the Fed raises rates:
The Prime Rate:
The prime rate is the lowest short-term rate of interest that can be charged for borrowing money. However this rate is only reserved for a lucky few with near-perfect credit. But the cost to borrow money generally goes up for everybody, since all rates are based on the prime rate.
Credit Card Rates:
Creditworthiness for a person or business is based on their risk profile. The more likely you are to be able to pay back what you borrowed (with interest), the higher your credit worthiness. The higher your credit worthiness, the lower your interest rate. Since the prime rate went up, consumers have to pay more interest. This makes everybody a little less creditworthy – so all credit card rates go up, too.
Money market and share certificates (and CDs) also have interest rates, which is then paid to consumers. Those rates also rise if the prime rate increases. In theory, this means that consumers will have more money to spend. But the higher interest rates on loans and mortgages might encourage people to pay off their debt rather than spend money in the economy.
S. National Debt:
The national debt is the amount of money that the federal government owes. With higher interest rates, the government now has to repay more money in order to borrow money. The increased borrowing raises the national debt.
Private Student Loan Rates:
Private student loans are usually adjustable-rate loans, meaning that the rate of interest changes with the changing Federal interest rate.