Lee Bernstein, Faith Pinho, and Benjamin Schaeffer
The Federal Reserve made headlines last week for its decision to raise the federal funds rate, indicating confidence in a strengthening economy. The Fed increased the interest rate to a range of 1.5 - 1.75 percent. Previously, the range was 1.25 to 1.5 percent. The unanimous decision by the Federal Open Markets Committee to raise the range by a quarter percentage point will affect several sectors in the short-run American economy. As Heather Long wrote in the Washington Post last week, “As the Fed boosts rates on financial institutions, banks turn around and lift interest rates on credit cards, auto loans, small business loans and home mortgages.” In this post, we will look specifically at how the Fed’s interest rate hike will impact credit cards, home mortgages and auto loans.
For many Americans, credit cards an important component of their financial portfolio. It enables many households to make larger purchases that they might not ordinarily be able to make. When the Federal Reserve raised its interest rates this week, many Americans do not realize they will be directly affected. The variable interest rates on most credit cards are tied to the prime interest rate which is determined by financial institutions and is directly correlated to the federal funds rate, which the Fed just changed. There will be increase almost equivalent to the change in the federal funds rates.
Another component to pay attention is the effect of the Fed changing interest rates on auto loans. USA Today, when discussing the market, said “they’re still benefiting from a highly competitive market for auto loans that’s keeping borrowing costs low”. This suggests that this specific change to interest rates may not have as large of an affect on car loans as it could. The same article pointed out that old car loans would not be affected by this change in interest rates. An AutoNews article discussed the car purchasers that will feel this changes are “the ‘marginal buyer’ with poor credit ‘is going to have to take that walk over to the used-car lot.’” So, not every American will be hard hit or feel the affect equally.
For homeowners with adjustable mortgage rates, they can expect a rise in their monthly mortgage bills. A singular rise in the federal funds rate would not significantly impact the mortgage rate, but this week’s rise -- in tandem with the two other expected hikes in 2018 -- would truly impact homeowners’ monthly payments. Economists at CNBC predicted that the average mortgage rate could rise from 4.58 percent to 5 percent by the end of the year. “Although your bills might not change too much after Wednesday's bump,” journalist Emmie Martin writes, “things can start to add up after a few more.” To avoid rising rates, Martin recommends switching to a fixed-rate mortgage. Current rates are favorable enough to justify making the switch.
Many industries will be affected by the Federal Reserve’s recent changes; however, as discussed in class, it will take up to two years to see the full effects of the interest rate increase. As the New York Times mentions, during this FOMC meeting, it was “signaled the central bank is set to raise it at least two more times this year”. But, the same article goes onto say how, these increases means that there is an “increased expectation for economic growth”. Like class discussion brought up, this increase sheds insight into Jerome Powell’s mindset given that this was his first FOMC meeting as president of the Federal Reserve.