Market Update: Fed Chair Says Rates Will Rise
A few weeks ago, Federal Reserve Chairman Jerome Powell took the stage at the annual Fed retreat in Jackson Hole, Wyoming. While he said many things, the one message that seemed the clearest was this: expect rates to continue to slowly rise.
Powell explained that he and the rest of the Fed see a lot of the strength in the United States economy and plans to keep on the current policy course. He said that the Fed is focused on balancing the dual risk of runaway and inflation that could get in the way of further economic growth in the future.
He added that if income and job growth continues across the board, further rate hikes could take place.
“I see the current path of gradually raising interest rates as the [Federal Open Market Committee’s] approach to taking seriously both of these risks,” Powell said. “As the most recent FOMC (The Federal Open Market Committee) statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds will likely be appropriate.”
Since December 2015, the Fed approved seven quarter-point rate hikes. That has brought target rates up to 1.75 percent to 2 percent. Previously, rates had been at zero as a result of the 2008 economic recession and subsequent recovery. There have already been two hikes so far in 2018, and two more are reportedly coming before the new year.
While Powell seems quite confident in the continuing strength of the United States economy, he did admit that there are several factors that could chance the policy course. Those factors included unsteady economic conditions overseas, as well as some kind of unforeseen economic downturn.
When it comes to inflation, Powell said that doing too little to control price increases could be a greater risk than doing too much to try and control them.
“The economy is strong,” Powell stated. “Inflation is near our 2 percent objective, and most people who want a job are finding one. My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2 percent.”
While he did mention that an economic downturn would be one of the causes of a change in strategy, Powell made a point to say that the Fed is confident in its sustained strong growth.
This continued interest rate increased will lead to an increase in a few things, and won’t change a couple more. Here are the things that a hike in the Feds rate will impact.
The Prime Rate
A hike in the Feds rate will likely have a big impact on the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
Credit Card Rates
As indicated by the explanation of prime rates above, banks will determine how credit-worthy other potential borrowers are based on their risk profile. rates will be impacted for credit cares and other loans as they both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those that are considered long-term borrowing.
Money market and credit-deposit rates increase due to the tick up of the prime rate as well. IN theory, this should boost personal savings among consumers and businesses as they can generate a higher return on their savings. IN truth, however, anyone with a debt burden would seek to pay that off to offset higher variable rates connected to credit cards, home loans, personal loans, and more.
U.S. National Debt
An increase in interest rates boosts the borrowing costs for the U.S. government and fuel and increase in the national debt. Back in 2015, when rates first increased, the Congressional Budget Office and Dean Baker, a director at the Center of Economic and Policy Research, estimated that the U.S. government may end up having to pay approximately $2.9 trillion more over the next decade due to increases in interest rate than it would have it the rates had stayed at zero.
Now that you know what an interest rate hike could increase, here’s what it probably won’t have much of an impact on.
Auto Loan Rates
Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will only have an incremental impact. Somewhat surprisingly, auto loans have not shifted all that much since the Fed announced the increased rates. That’s largely because auto loans are longer term loans and therefor, are less impacted by interest rate increases.
News of further interest hikes may lead you to feeling rush to closing on that deal for a fixed loan rate on a new home. The truth is, however, is that mortgage rates tend to fluctuate much more with inflation rates than they do with increased interest rates. Beyond that, as has been previously mentioned, rate hikes typically impact short-term loans as opposed to long-term loans. There are few longer-term loans than a traditional mortgage. Therefore, you shouldn’t worry too much about an incoming increase in your mortgage rate as a result of the past and upcoming rate hikes.