Much to U.S. President Donald Trump’s chagrin, most people are expecting the Federal Reserve to hike rates a fourth and final time for 2018. While the capital markets hang on the central bank’s every word during the rate decision, most consumers don’t.
However, the Federal Reserve has more of an impact on consumers’ lives than they might think. As such, here are four ways the Fed decision can directly impact consumers.
1. Mortgage Rates
Mortgage rates move according to a confluence of factors, such as demand for housing and other economic factors tied to real estate. However, the Federal Reserve can still affect mortgage rates indirectly.
The effect of short-term rate adjustments will not typically impact fixed-rate mortgages. However, existing homeowners with an adjustable-rate mortgage should take note.
“If you took out a 5/1 ARM in the last year or two you still have that low initial rate for another three or four years. You might not want to run out and refinance that just yet,” says Frank Nothaft, chief economist for CoreLogic. “But if you took out your 5/1 ARM four or five years ago, you’re coming up to that adjustment period. Your interest rate will go higher. Depending on the terms in your contract, it could jump up a couple of percentage points.”
2. Credit Cards
Credit cards are typically tied to the prime rate, which is close to three percentage points ahead of the federal funds rate. As such, the prime rate is readily affected by the short-term rate adjustments instituted by the Federal Reserve.
“What the Federal Reserve does normally affects short-term interest rates, so that affects the rates that people pay on credit cards,” said Gus Faucher, chief economist with The PNC Financial Services Group.
3. Savings Account Rates
Higher interest rates can translate into more competitive rates for savings accounts that offer income via a payment of interest. These types of savings accounts are also known as money market accounts.
In particular, online banks can offer competitive rates as opposed to brick-and-mortar banks that pay less interest to account for their higher operational costs. Consumers can utilize online resources, such as Bankrate to locate the best rate available for their savings deposits.
4. Auto Loans
Higher or lower interest rates will affect the cost to finance a vehicle. Nonetheless, car dealers may offer consumers discounts and incentives to offset the higher costs of financing associated with a rate hike by the Fed.
Furthermore, consumers can always haggle for a lower price and use the current rate hikes as leverage during negotiations. A prospective car buyer can also seek his or her own financing as opposed to those offered by the dealership.
“Auto manufacturers frequently offer discounted financing to encourage car sales, and banks and other lenders compete with those rates,” said Tendayi Kapfidze, chief economist of LendingTree.
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