Seven years to the day since the Federal Reserve System last changed its benchmark interest rate — essentially lowering it to zero — America’s central bank finally raised the rate today by 0.25 percent.
The Federal Reserve System, commonly known as “the Fed,” is responsible for setting monetary policy for the country. Since Dec. 16, 2008, the Fed’s target rate has been 0 to 0.25 percent.
For the past several years, experts and pundits have been chattering about the possibility of an impending rate hike. Now that it finally has happened, the average American’s financial life is about to change. Here’s what you need to expect:
A rise in the Fed’s benchmark interest rate affects certain types of real-world interest rates more than others.
If you are shopping for a fixed-rate mortgage, don’t expect drastic changes. But things may be different if you are shopping for an adjustable-rate mortgage — or if you already have one. As CNBC reports:
The Fed has little influence over long-term, fixed-mortgage rates, which are pegged to yields on U.S. Treasury notes, so don’t expect higher mortgage rates to weigh on your ability to buy a home or refinance in the near future.
But with interest rates rising, adjustable rate mortgages could be heading higher, too — so don’t be surprised to see some payment increases down the road if you have one.
Expect borrowing costs on credit cards to rise. Most credit cards come with a variable rate, and that rate adjusts over time. Forbes reports that you should expect the rate on the cards in your wallet to rise “almost immediately”:
Most credit card agreements will state that “APRs will vary with the market based on the Prime Rate.” If the prime rate increases, the interest rate on your existing balance will increase as well.
Interest-bearing savings accounts and CDs
Rising interest rates will benefit money in interest-bearing bank accounts, money-market accounts and certificates of deposit.
Because the Fed is expected to gradually increase its rate over time, however, consumers should not anticipate a quick upward rebound in the interest rates they are paid on these types of accounts.
If you put money in your savings account or have certificates of deposit, you earned almost zero interest in the last seven years. That will begin to change over the next couple years, even if it’s slow. Big banks won’t start offering higher interest on savers’ deposits immediately, experts say.
The first change to the Fed’s rate in seven years could cause markets to panic, but the effect should be minor and short-lived.
As Money Talks News founder Stacy Johnson wrote this time last year in “Ask Stacy: The Most-Asked Questions of 2014“:
Rising rates aren’t typically good for either stocks or bonds, but the increases should be both small and gradual. If corporate profits and employment continue to improve, the positives should outweigh the negatives and stocks can continue to advance.
Have you made any changes to your finances or budget in preparation for an impending rate hike by the Fed? Let us know below or on Facebook.