5 Ways a Fed rate hike could affect your pocketbook - WRCBtv.com | Chattanooga News, Weather & Sports

5 Ways a Fed rate hike could affect your pocketbook

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The Federal Reserve Building in Washington. AP photo The Federal Reserve Building in Washington. AP photo


The Federal Reserve will announce at 2 p.m. ET Thursday whether it will raise its benchmark federal funds rate for the first time in almost a decade.

The Fed's Open Market Committee adjusts the rate -- the interest rate that banks charge other banks on overnight loans -- to influence the supply of money, control inflation and keep the economy stabilized. The rate has been in the zero to 0.25 percent rate since Dec. 16, 2008, when the committee cut it to help the U.S. economy pull out of a steep recession triggered by the housing crash.

Rate changes impact consumers in more direct ways, too. Don't expect your finances to change overnight, but the Fed's decision will influence certain financial products and services. Here are five ways you can expect to feel the impact on your pocketbook:

1) Monthly credit card bills jump - Your credit card's interest rate is probably variable, meaning it can and will change along with the Fed's rate. If you carry credit card debt, this means you can expect to pay more in interest over time.

"If the Fed lifts the policy rate, credit card companies will increase the variable rate," said Megan Greene, chief economist at Manulife Asset Management. "Credit card debt has always been among the most expensive to service, so I would recommend anyone with debt pegged to short-term rates work to pay that down as quickly as possible."

Other debt tied to short-term interest rates include home equity loans and lines of credit, private student loans, and auto loans. Of course, if your loan rate is fixed, it's not going to change. But if it's variable, expect to see an increase.

It's hard to say how long it will take the numbers to rise, as it depends on how gradually the Fed decides to increase the federal funds rate. However, it helps to be prepared, and if you're working to pay off multiple debts, consider prioritizing variable debts with higher rates.

2) Your mortgage could go up - unless it's fixed - If you have a fixed-rate mortgage, you're golden. Your interest rate is set and the Fed's decision won't impact your loan terms.

But if you have a variable or adjustable-rate mortgage, you can likely expect to see an increase. It's probably nothing to lose sleep over, but it might be worthwhile to lock in a low, fixed rate while you still can, before subsequent rate hikes. As the increase takes effect, rates will be higher for new homeowners shopping for mortgages, too.

Even before the Fed's decision, average long-term U.S. mortgage rates were inching higher. Mortgage giant Freddie Mac said early Thursday that the average rate on a 30-year fixed-rate mortgage edged up to 3.91 percent from 3.90 percent a week earlier, its second straight weekly increase. The rate on 15-year fixed-rate mortgages rose to 3.11 percent from 3.10 percent.

3) Savings accounts pay a little more interest - Bank savings account and certificate of deposit (CD) interest rates have been historically low since the Fed's rate cut in 2008, with the national average at a paltry 0.06 percent, according to the FDIC. When the Fed raises interest rates, savers can finally expect to see higher yields from such accounts. In 2007, savings account rates averaged about 3 percent, according to the U.S. Census.

It's tough to predict just how much more we can expect to earn. That depends on a variety of factors, including the type of account you have and how quickly your bank's willingness to pass on benefits of higher rates to account holders.

The last time the Federal Reserve began raising rates, in June 2004, it was 90 days before banks paid consumers higher rates for their basic savings accounts, said Dan Geller, who tracks the outlook for deposits at Analyticom. It took 10 months for banks to pay even 0.2 percentage points more on so-called money market deposit accounts and by then the Fed's rate was up 1.75 percentage points.

4) The job market cools slightly - Part of the reason the Fed is considering a rate increase is that the economy is on the mend and unemployment rates are at a seven-year low. An interest rate hike would be expected to slow hiring somewhat.

If the Fed raises the rate today, that would indicate that it believes the labor market has recovered enough to withstand a slight braking on hiring. But since it is expected to raise the rate only to a range of 0.25 percent and higher, no dramatic change in hiring or the unemployment rate would be expected in the short term.

5) Stocks could see more volatility - The mere expectation of a rate hike impacts the stocks, and speculation that the Fed was getting ready to raise its benchmark rate has contributed to recent market turmoil.

The stock markets are affected indirectly by the Fed's rate, because investors expect that companies will either cut back on growth or make less profit as it becomes more expensive to borrow. That leads to less demand for stocks, and can lead to broad declines in the markets as a whole.

U.S. markets have largely anticipated that the Fed was preparing to raise the interest rate, so it will take time to see what impact a rate hike will have.

"If it seems possible that the Fed will start hiking rates quickly and sequentially, as it always has done in the past, then consumer and investor confidence might be sunk and spending and investing could halt," Greene said. "It seems more likely the Fed will make it clear that it will only hike if the data warrants it and plans to do so very slowly," which would be expected to have a less dramatic impact on stocks.

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