Last month The Federal Reserve raised short-term interest rates again — the fourth increase this year. The markets didn’t take kindly to the increase, causing speculators to reconsider whether previously forecast 2019 rate hikes will actually materialize. The Fed moves interest rates, typically, to accomplish two goals: to keep inflation in check and to maximize employment. If the economy is thriving, people are spending more money. If people are buying more, there’s a greater demand for goods. In order to curb inflation, the Fed will raise rates so that things will become more expensive and people will reduce their buying and borrowing. The opposite scenario is also true.
But whatever happens next year, the recent changes in interest rates impact your borrowing costs for credit cards, student loans, auto loans, CDs and savings accounts. Here’s the lay of the land.
The interest on your credit card may be the most sensitive to the Fed’s changes. As short term interest rates rise, credit card rates typically do so in lockstep. That means that spenders, or people who finance purchases on credit, will ultimately end up paying more in interest if they do not pay off their balances in full each month. In 2018, Americans paid banks $104 billion in credit card interest and fees, up from 11 percent from 2017 and up 35 percent over the last five years. In part, that’s due to increased spending, but it also shows how the Fed rate increases are passed on to consumers.
While rate hikes may not be the best news for credit cards, they are good news for consumers with savings accounts. When the Fed raises rates, some banks will pay more interest on your account. Same goes for CDs and online savings accounts. Which savings vehicle will benefit you the most? It depends on your goals, risk profile and comfort level says CFP Bill Losey. “It appears that online savings account will tend to offer slightly higher yields than traditional bank CDs. Some people are okay with online banking; many older folks and baby boomers I work with tend to feel more comfortable walking into a bank branch location and actually dealing with a human being.” It should be noted that many online banks now offer rates of more than 2 percent — which is over 20 times what typical accounts pay. Credit unions and small banks, too, typically offer better rates.
When the Fed meets (about eight times a year), they also make decisions that’ll affect the job market. When the Fed raises interest rates, that tends to slow down the economy which in turn leads to fewer people getting hired. And less money for companies to spend means lesser chances that you will get a pay raise. It should be noted, though, that December’s job numbers — which blew past expectations — combined with wage gains continue to show strength in the economy.
Student and Auto loans
Like credit card rates, auto loans typically move up and down in sync with the federal funds rate. When rates go up, you pay more if you finance your purchase. That said, there are also generally below rate financing offers from particular car makers looking to move certain models. If you’ve got good credit and are agnostic about which car to buy, looking for a great financing deal can save you a bundle.
Student loans are a slightly different beast says Losey. “Many student loan borrowers use fixed federal loans however many also use private loans. The latter have rates that can be either fixed or variable. These student loan rates are often tied to the prime rate or treasury bill rates,” says Losey. Essentially, if the Fed is raising rates, private borrowers will likely pay more in interest too.
With Hattie Burgher