At the end of last year, the Federal Reserve raised its benchmark interest rate for the second time since the subprime mortgage crisis. The move came as a shock to some considering the sharp increase in global political tension following the Brexit and the election of President Donald Trump. Nonetheless, the central bank voted to raise its key interest rate in December to a range of 0.50 to 0.75 percent from the previous range of 0.25 to 0.50 percent. Although the change seems minor, the federal funds rate set by the Federal Reserve is the baseline interest rate for nearly all financial institutions in the United States. If the Fed raises interest rates, banks will subsequently raise interest rates as well, especially on certain types of loans such as credit card debt or home equity credit.
Tensions have been high among both politicians and economists alike since the global financial crisis. And yet the Fed’s chairperson Janet Yellen, with the whole world watching, decided to raise interest rates in December both last year and in 2015. Yellen and other members of the Fed have noted vast improvements in the economy over the past few years, in particular labor market. But while the economy continues to recover, Yellen and other economists at the Fed are still cautious and believe it makes more sense to gradually increase interest rates over time. Increasing rates too slowly would result in high inflation and consumer prices. Raising interest rates too quickly may push the economy into recession. The Fed’s chief said she believed interest rates would be raised a few times per year through 2019.
There are major issues facing the global economic order, but for now it appears that the Federal Reserve is confident in the US economy and will continue to raise interest rates at a more rapid pace. Although the interest rate hikes will be gradual, the impact will still be enormous. Not only will businesses be affected, but consumers will have to adapt as well. There are several consequences of interest rate hikes on consumers.
One of the biggest issues during a period of rising interest rates are the number of people with large variable-rate debt, especially adjustable rate mortgages. The interest rate on any variable-rate loan will increase, including many mortgages, leaving many borrower’s struggling to make timely and full payments. Interest rate hikes will also affect people who desire a new fixed-rate mortgages after interest rates are raised. Even a minor increase to the interest rate on a fixed-rate mortgage can end up costing tens of thousands of dollars over the course of the mortgage, which may effectively price-out many home buyers.
Contrary to popular belief, this time around interest rate hikes will not be to the benefit of savers. A comprehensive report from WallHub reveals that banks are already increasing credit card interest rates while hardly increasing the interest rate yield on checking and savings accounts. The report said that during the last half of 2016, the average interest rate on new credit card offers jumped by 0.31 percent, whereas the average yield on checking and savings accounts only rose 0.01 percent. Savers will end up spending more to cover rising interest rates while not receiving similar gains on their savings accounts.
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