The Federal Reserve recently announced an interest rate increase of 0.25%—a move that signals the Fed’s increasing confidence in the US economy. This latest increase is only the second increase in the past ten years. Keep reading to learn more about the Federal Reserve and what the recent rate increase means to you.
Federal Reserve System
The Federal Reserve has existed since 1913 as the United States’ central banking system. Congress created the Federal Reserve in order “to provide the nation with a safer, more flexible, and more stable monetary and financial system” (FAQ). The Fed’s duties include regulating the nation’s banks, ensuring that the financial system remains stable, and “overseeing the nation’s payments systems” among other things (FAQ).
Why Raise or Lower Interest Rates?
In general, the Fed usually changes interest rates to help the economy grow or to prevent inflation from hurting the economy. If interest rates stay low long enough, then inflation can increase. When interest rates are raised, though, the dollar typically becomes stronger which makes it easier for Americans to invest in foreign organizations.
How the Latest Increase May Affect You
- Retirement Savings – In the short term, it won’t be surprising if the stock market experiences some anxiety as a result of the increase. Whether the rate increase will negatively affect your portfolio or not ultimately depends on what assets you hold and where you are on your retirement timeline.
- Savings Account – When the Fed increases interest rates it takes some time before “real interest” rates are affected. Eventually saving account rates may increase, but the increases are not likely to be significant.
- Credit Cards – It’s likely that the interest rates on your credit card will increase since credit cards are affected by the prime rate. Credit card companies don’t have to give any notice when an APR increase occurs due to prime rate increases. When a card’s APR increases debt becomes more expensive, so be on the lookout for any change to your credit card statements.
- Mortgage – Mortgage rates rose after the presidential election. If the Fed continues to raise interest rates, then it’s likely that by the end of the year mortgage loan rates may be close to 5%. Homeowners with fixed-rate mortgages don’t have to worry about the Fed’s actions. However, homeowners with adjustable-rate mortgages may want to consider purchasing a fixed-rate loan since payments will likely increase.
- CDs – CD rates will experience the same type of movement that savings accounts will experience: rates will eventually increase but not by much. Since most CDs come with fixed interest rates, they remain unchanged when the bank raises its rates. Some banks offer bump-up CDs that allow customers to take advantage of rate increases. You can learn more about bump-up CDs here.