How Another Interest Rate Hike Could Affect You

Blog Post01/13/2017
Home Buying

You might not be sure what the phrase “federal interest rate hike” means, much less how it will affect you personally. Here’s how it works.

The Federal Funds Rate

The Federal Reserve Board meets periodically to size up the national economy. They might decide to lower the interest rate — technically called the Federal Funds Rate — like they did at the end of 2016. The goal is to make borrowing easier and rejuvenate a poor economy. Interest increases usually correspond with an effort to stabilize an economy that’s growing too fast, to safeguard against runaway inflation.
Credit card lenders might bump their interest rates up as well. It usually takes more than a single rate increase to raise credit card interest, but if an additional hike occurs in January, your cards could be affected.

Bond prices tend to fall when the Feds hike the interest rate, so you may see some depreciation in value if you’re invested in this type of vehicle. Federal rate hikes could also affect stocks, sending them up and down while everyone waits to see what happens to the economy next.

Would you like to see your credit score now?   YES, SHOW ME MY CREDIT SCORE

The History of Rate Hikes

For almost 10 years, the Federal Funds Rate was completely stagnant. But in 2014, the Federal Reserve Board began murmuring that the rate should go up. It finally happened in December 2015 when the rate increased from zero (where it was set in 2008 thanks to the Great Recession) to 0.25 percent. This was the first increase since 2006.

It was anticipated that the December 2015 increase would prompt additional rate hikes in early 2016, but as of September, that hadn’t happened. However, the final 2016 jobs report revealed 178,000 jobs had been created, unemployment declined to 4.6% and Donald Trump was elected. These factors culminated in a December rate hike to a range of 0.50%-0.75%.
The Downside

You’ll pay more interest on mortgage loans as the Federal Funds Rate increases, so if you’re thinking of buying a home or refinancing your existing mortgage, you might want to consider acting sooner rather than later. If you currently have an adjustable rate — the kind where the interest rate can fluctuate in keeping with the Fed rate — you may see an increase in your monthly payments. Most lenders only increase interest rates annually, however, not immediately after every increase. Depending on when yours adjusts, you may not see higher payments immediately.

Credit card lenders might bump their interest rates up as well. It usually takes more than a single rate increase to raise credit card interest, but if an additional hike occurs in January, your cards could be affected.

Bond prices tend to fall when the Feds hike the interest rate, so you may see some depreciation in value if you’re invested in this type of vehicle. Federal rate hikes could also affect stocks, sending them up and down while everyone waits to see what happens to the economy next.

The Good News

That savings account you’ve been sitting on might pay increased interest if banks pass on to their depositors a share of the extra interest they’re charging on loans. Some institutions have indicated that they’re not planning to do this, however. In general, rate hikes tend to make the U.S. dollar stronger on a global scale — after all, they happen because the economy is good. 

Disclaimer: The information posted to this blog was accurate at the time it was initially published. We do not guarantee the accuracy or completeness of the information provided. The information contained in the TransUnion blog is provided for educational purposes only and does not constitute legal or financial advice. You should consult your own attorney or financial adviser regarding your particular situation. For complete details of any product mentioned, visit transunion.com. This site is governed by the TransUnion Interactive privacy policy located here.