Understanding the impact of the fed funds rate hikes
In late September, the Federal Reserve increased the 2018 fed funds rate for the third time in 2018, which is a sign of increased confidence in the U.S. economy. But the 0.25 percent increase in the target interest rate has left many people wondering what the financial impact will be on Americans from both a personal and business perspective.
Consumers will see higher borrowing costs
The most significant impact on consumers will be higher borrowing costs. Increased interest rates on mortgages and car loans will likely result in higher monthly payments for new loans or variable interest rate loans. Consumers should consider converting variable rate loans to fixed rate loans.
Investors should also be aware that the value of bonds and interest rates are inversely related, meaning that when interest rates rise, the value of bonds falls. Therefore, while bonds and mutual funds that are made up mostly of bonds have historically been considered “safe” investments, they will lose value as interest rates increase.
On the positive side, consumers may soon see money market rates well above two percent, which are levels we haven’t seen in a decade, making them a potentially advantageous investment opportunity.
Refinancing slowly halts
For homebuyers, refinancing could decelerate since so many people have already taken advantage of historically low fixed rates. However, housing demand will likely remain robust, and mortgage demand isn’t anticipated to be affected until mortgage rates hit six percent.
Lock in a fixed interest rate
Consumers with variable rate credit card balances may have a harder time paying them off, because more of the monthly payment will go toward interest. If the option is available, consumers may want to consider paying off revolving debt and locking in a fixed interest rate on their credit cards while rates are still low.
Businesses should consider refinancing for the long-term
Businesses that borrow money may see their interest rate costs increase, so they should monitor and plan for their variable rate debt. Even though rates have been historically low in recent years, the new increases can cause future projects to be costlier than in the past few years. One way to work around this is to refinance any variable rate debt into fixed interest rates with a longer term.
As with any change in the economic environment, there are upsides and downsides to rising interest rates. Whether you’re managing your personal finances or overseeing a business operation, it’s important to understand the potential impacts of higher interest rates, understand and fully vet your options and then make necessary adjustments.
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