Fed Raises Benchmark Rate Again, How Will This Affect You?

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The Federal Reserve (Fed) raised its benchmark rate by a quarter percentage point, from 1% to 1.25%effective June 15, 2017. A reading of the Fed’s policymaking body, Federal Open Market Committee (FOMC)’s statement signals that this won’t be the last rate hike this year. As the benchmark rate goes up, how will it affect your existing debts? What will happen to mortgage rates?

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FED’S JUNE RATE HIKE

For the second time this year, the FOMC voted unanimously for a rate hike despite a declining inflation rate that is below its two-percent threshold. But under its “accommodative” monetary policy stance, it expects for conditions in the labor market to strengthen and for the inflation rate to have a sustained return to two percent.

“In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1 to 1-¼ percent,” the FOMC’s statement on June 14 read.

The FOMC also spoke about future adjustments to the benchmark rate, noting that it will take into account economic conditions — real and expected — together with its objectives of a two-percent inflation rate and maximum employment.

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

As part of its monetary policy stance, the FOMC outlined its plan to normalize its balance sheet and offload its Treasury securities and mortgage-backed securities (MBS) holdings.

The Fed will set a cap of $6 billion per month for Treasury securities and will gradually increase over a 12-month period in such a way that the cap will $30 billion a month. For MBS holdings, it will set a cap of $4 billion that will also gradually increase until it reaches $20 billion a month.

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FED RATE HIKE AND YOU

The federal funds rate is referred to as a benchmark rate because it is the basis for the prime rate which is used by banks to set rates for short-term loans. When the Fed raises its benchmark rate, expect the prime rate to rise and nudge long-term rates in the process.

Mortgage Rates

The current Fed rate hike will primarily affect adjustable-rate mortgages and home equity lines of credit owing to their variable rates. This means putting in extra to the usual monthly payments. If you have an ARM, it might be a good time to refinance and protect yourself from further rate increases.

As to long-term rates, they moved along with Treasury yields and are influenced by the Fed in that they can rise when the economic outlook is good and can fall when the outlook is not so good.

As of Friday, June 16, 30-year fixed-rate mortgage rates averaged 3.91%, up from 3.89% on June 15. For 15-year FRMs, the average rate also rose from 3.16% to 3.18% within the same period.

OTHER CONSUMER LOANS

As rounded up by CNBC, holders of credit cards will likely feel the effect of a higher fed funds rate in the form of higher payments as their rate increases.

For student loans, the pinch would differ on whether you have a federal-backed student loan or a privately-backed student loan. Federal student loan borrowers with their fixed-rate loans will not feel the immediate effect of the rate hike. But borrowers with loans from private lenders that are based on prime rates will likely see an increase in their monthly payments.

The rate hike is also expected to have little effect on car loan rates. But your credit standing does matter when you take out a car loan.

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