What a Fed rate hike means for you (get ready to pay more)

The Federal Reserve’s decision Wednesday to lift its benchmark short-term interest rate by a quarter percentage point is likely to have a domino effect across the economy as it gradually pushes up rates for everything from mortgages and credit card rates to small business loans.

The Fed forecast slightly faster increases the next few years amid the prospect of a massive government stimulus, signaling three similar hikes next year.. There are a couple of wild cards in the mix that could have a bigger effect on borrowing costs than the Fed.

President-elect Donald Trump’s plan to cut taxes and spend up to $1 trillion to upgrade infrastructure, combined with forecasts of rising oil prices, have driven up inflation expectations and long-term bond yields in recent weeks. Such factors could play a significant role again next year.

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“Fiscal policy may have a bigger say” than Fed interest rate decisions, says John Canally, chief economic strategist for LPL Financial. That would mark a shift from prior years, when Fed action had an outsized effect on a slowly growing economy.

Still, the Fed’s decision to lift the federal funds rate, which is what banks charge each other for overnight loans, could have at least some effects on consumers:

Mortgages

Thirty-year fixed mortgage rates have climbed above 4% since late October, costing the holder of a $200,000 mortgage about $75 more a month. That’s because 10- year Treasury bond yields have jumped about a percentage point since September, partly on Trump’s fiscal stimulus plan and faster inflation forecasts.

The Fed’s key short-term rate affects mortgages and other long-term rates only indirectly. Wednesday’s anticipated hike was priced into such mortgage rates, but three more quarter-point rate bumps next year could lift mortgage rates by a total of an additional 3/8 of a point, says Greg McBride, chief economist of Bankrate.com. That would mean an additional $44 a month in payments on that $200,000 mortgage.

On the margins, that could discourage a small portion of home purchases, says Steve Rick, chief economist of CUNA Mutual Group. That effect could be more than offset by a tight labor market and faster-growing economy pushing up average wage gains, allowing homebuyers to easily afford the added cost, Canally says.

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Other factors may loom large. If Congress fails to approve Trump’s fiscal stimulus, for example, long-term rates could fall regardless of the Fed, while a faster-growing economy and higher inflation could drive up borrowing costs.

Adjustable-rate mortgages, by contrast, typically are modified annually and probably would be affected more significantly by four Fed hikes over the next year (including Wednesday’s), McBride says. Adjustable rates, he says, could rise about three-quarters of a percentage point in that period, increasing the monthly payment of the $200,000 mortgage by $84.

Auto loans

Typical five-year auto loans will be more directly influenced by a quarter-point increase in the Fed’s key short-term rate, with a 4.25% car loan rate rising by a similar quarter-point, or $3 a month, McBride says. Wednesday’s move and three similar rate increases next year would increase the monthly payment for a new $25,000 car by a total $12.

“Interest rates are going to be a non-issue,” he says.

Auto sales are likely to moderate after peaking this year, so manufacturers are likely to roll out other incentives, such as lower prices or rebates that temper costs, Canally says.

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Credit cards and home equity lines of credit

Revolving loans with variable rates, such as credit cards and home equity lines of credit, will feel the most immediate impact from an increase in the Fed’s key short-term rate. Average credit card rates are about 16.25%, while home equity lines are about 4.75%, according to Bankrate.com. Banks should pass along quarter-point increases in the federal funds rate to those consumer rates within weeks.

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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. Don’t expect a fast or an equivalent rise in your savings accounts or CD rate. Since the recession, Americans have kept a big share of their money in banks, so banks don’t have to offer big incentives to draw more deposits so they can lend more, McBride says.

Low interest rates have spelled narrow profit margins for banks for years. They have an opportunity to benefit from a bigger margin between what they pay in interest and what they earn from loans.

As a result, bank savings and CD rates may rise only after a lag of six months or more after a Fed move, McBride says. An increase of a percentage point in the Fed funds rate by late next year may lead to a rise of 30-35 basis points in savings and CD rates.

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