Personal Finance

7 Ways the Federal Reserve Rate Hike Will Affect You in 2016

By Laura Woods

After much speculation, the Federal Reserve announced Dec. 16, 2015, that it would raise interest rates for the first time since June 2006. The Fed rate hike means the target funds rate range that was 0 percent to 0.25 percent will increase to a range of 0.25 percent to 0.5 percent.

Federal Reserve System Chair Janet Yellen said the decision to raise rates was due to strong economic recovery and the fact that the labor market has shown major improvements.

“With the economy performing well, and expected to continue to do so, the [Federal Open Market] Committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase, monetary policy remains accommodative,” Yellen said.

You might not feel the impact of the rate increase right away, but you can be aware of its potential effects. Here are seven ways the Federal Reserve rate increase could affect your money in 2016.

1. Some Mortgage Rates Will Rise

Contrary to popular belief, not all mortgage rates are directly related to the decisions of the Federal Reserve Board. Adjustable rate mortgages and home equity lines of credit will be most impacted by the Fed rate hike, but most 30-year, fixed-rate mortgage rates are based on the 10-year Treasury bond, according to The New York Times. Prices are determined according to a number of factors, including long-term economic growth, inflation outlook and short-term interest rates.

If you have an ARM that currently has annual readjustments or will soon, you might want to consider refinancing it to a fixed-rate mortgage now because doing so could save you a significant amount of money in the future. Conversely, if your adjustable-rate mortgage rate is locked in place for a few years, it’s probably best to wait and see what the future holds.

HELOCs will likely rise with the Fed funds rate to an approximate average of 5.5 percent, reported The New York Times. Locking in a fixed rate tends to result in a rate increase, so take the size of your loan and the amount of time you plan to pay it off into consideration before making a move.

2. Possible Slight Increase in Auto Loan Rates

The auto industry has seen record-breaking sales in 2015, due at least in part to low interest rates, according to USA Today. Rates for new cars are expected to remain low, at least in the foreseeable future, as manufacturers get most of their profits from auto sales — not financing costs — so they want rates to remain low.

The gradual rise in Fed interest rates will eventually impact buyers because automakers will likely pass the cost of financing on to customers when it becomes unmanageable. Interest rates for used cars are expected to rise before that of new cars, reported Reuters, as captive lenders are focused on financing brand-new models.

3. Steady Deposit Account Rates

Prepare to be a little disappointed if you think the Federal Reserve rate increase will quickly be reflected in your checking and savings accounts. Banks are actually primed to increase their rates slower than the Fed, as they’re currently flush with deposits and don’t need to draw new customers in with a rate hike, according to U.S. News. Financial institutions are expected to raise rates on loans but keep deposit account rates low, which will allow them to increase their bottom line.

If you’re set on finding a higher rate, your best chances are with online banks, credit unions and local community banks currently offering the most competitive returns.

4. Increase in Money Market Mutual Fund Rates

Money market funds typically invest in short-term, fixed-income securities, such as Treasuries. Yields on these funds have averaged significantly lower than 1 percent over the past few years.

This trend is expected to change with the Fed rate increase. The New York Times reported that investors can expect returns to increase to approximately 0.35 percent from the current 0.10 percent, although exact yields will fluctuate by fund and provider.

5. Lower Stock Market Gains

The stock market has been volatile but has strengthened while interest rates have loomed at or near zero, and the rate increase could cause a bit of short-term uncertainty, reported The Washington Post. So far, the outlook remains promising for investors, as U.S. stocks rose after the rate increase announcement.

Even if the market remains steady, average returns might drop a few points. Although this could seem alarming at first, it’s important to focus on your long-term investment goals instead of panicking about the current state of your portfolio.

6. Higher Credit Card Interest Rates

Credit cards have variable interest rates, which are directly impacted by the rate set by the Federal Reserve Bank. The 0.25 percent increase is relatively small, so it shouldn’t make too much of a dent in your budget, but as the rate continues to climb, it could become increasingly difficult to pay your credit card bill.

Banks might also reduce the number of zero-percent interest rate offers for new credit cards, according to The Washington Post, making it harder to pay off your credit card balance without being hit with additional interest rate fees. If you currently have an outstanding balance, try to pay it off as quickly as possible before rates rise even higher.

7. Stronger U.S. Dollar

Now that the interest rate has finally risen, the U.S. dollar will become stronger. If you plan to travel abroad, this means the exchange rate will be more favorable, so your money could go further in foreign countries.

Although this means the Fed rate hike could be beneficial for vacationers, it’s not so great for U.S. companies that sell products in foreign markets, as it makes products more expensive and potentially less appealing to consumers, according to CNN Money. A stronger dollar also impacts foreign companies and countries that borrow money in U.S. dollars by making their debt more expensive, which can curtail economic growth.

Speculation has already begun on when the next Fed rate hike will occur, but Yellen said she doesn’t expect equally spaced increases.

This article was originally published on GOBankingRates.com.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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