While the impact of a single rate increase is limited, “The cumulative effect of the Fed’s interest rate hikes is mounting,” says Greg McBride, chief economist of Bankrate.com. “It’s putting a financial squeeze on household budgets at a time when income growth remains elusive.”
The central bank has raised rates five times since late 2015.
For consumers with 30-year mortgages and other longer-term loans, the effect of the Fed’s move on their pocketbooks will be far more gradual. Car buyers may be affected, too, though they’re now benefiting from a highly competitive market for auto loans that’s keeping borrowing costs low.The Fed lifted its federal funds rate — which is what banks charge each other for overnight loans — by a quarter percentage point to a range of 1.25% to 1.5% following similar hikes in March and June. Fed officials have penciled in three more rate increases next year.
Here’s how the moves could affect consumers:
Credit cards, HELOCS, adjustable-rate mortgages
These loans will become more expensive since their rates are directly linked to the prime rate, which in turn is affected by the Fed's key rate., says Steve Rick, chief economist of CUNA Mutual Group.
Average credit card rates are 16.75%, according to Bankrate.com. For a $5,000 credit card balance, a quarter point hike is likely to add $199 in total interest for borrowers who make the minimum monthly payment, McBride says. Three Fed rate increase this year could mean an additional $575 in total interest.
Now is “a good time for consumers carrying credit card debt to prioritize paying it down, since that debt will soon become more expensive,” says Kim Palmer, a credit card and banking analyst for NerdWallet.
Rates for home equity lines of credit are much lower at 5.3%. A quarter point increase on a $30,000 credit line raises the minimum monthly payment by just $6 a month, McBride says. The three hikes this year would mean an $18 rise in the monthly bill. Borrowers could feel these effects within weeks.
By contrast, rates on adjustable-rate mortgages are modified annually. So the impact may be delayed but it could still pinch. Three quarter-point hikes in 2017 likely will have boosted the monthly payment on a $200,000 mortgage by $84.
The Fed’s key short-term rate affects 30-year mortgages and other long-term rates only indirectly.
The average 30-year fixed mortgage rates is 4.08%, down from 4.15% a year ago despite the Fed’s hikes. Many factors have pushed down long-term rates, including still sluggish inflation prospects that have kept a lid on long-term rates. And Wednesday’s move is already figured into current mortgage rates.
“Home buyers and refinancing homeowners seeking fixed-rate mortgages shouldn’t be nervous,” says Tim Manni, a mortgage analyst for NerdWallet.
That said, the three rate increases in 2017 theoretically could have increased mortgage rates by about a quarter percentage point, according to Doug Duncan, chief economist of Fannie Mae. That would boost the monthly payment on a $200,000 mortgage by about $30. Other forces pushed rates down even further.
The Fed also announced in September that it’s shrinking the bond portfolio it amassed after the financial crisis to lower long-term rates. Together, the rate hikes and the unwinding of the Fed’s portfolio could increase mortgage rates by half a percentage point a year, says Lynn Fisher, vice president of research and finance for the Mortgage Bankers Association. For that $200,000 mortgage borrower, it could mean shelling out an additional $180 a month by the end of 2019.
“I think for most people, buying a house isn’t contingent on interest rates … but (the prospect of higher rates) may help speed things up,” coaxing fence-sitters to pull the trigger sooner rather than later, Fisher says.
Three rate hikes this year theoretically would increase the monthly payment for a new $25,000 car by a total of $9.
But McBride says, since competition among lenders holding down auto loan rates. The average rate for a five-year car loan is 4.08%, virtually unchanged from two years ago, he says.
Bank savings rates
Since banks will be able to charge a bit more for loans, they’ll have a little more leeway to pay higher interest rates on customer deposits. Yet don’t expect a fast or an equivalent rise in your savings accounts or CD rates, many of which pay interest of 1% or less. Those rates have barely budged the past year despite the Fed’s hikes.
Low rates on loans have meant narrow profit margins for banks for years. They have a chance to benefit from a bigger margin between what they pay customers in interest and what they earn from loans.
But a handful of online, community and other banks that are hungrier for deposits have increased their average top savings account rate from 1.1% to 1,55%, according to Bankrate.