What the Fed rate hike means for your finances

For just the third time in a decade, the Federal Reserve increased short-term interest rates (“federal funds rate”) by 0.25 percent. Because the federal funds influences other interest rates such as the prime, which is the rate banks charge their customers with higher credit ratings, and also indirectly influences longer-term rates for mortgages, this move will have an important impact on consumers.

Savings: Savers are rooting for rate hikes, because the average one-year CD rate hasn’t paid more than about 1 percent since 2009. Rock-bottom rates have cost savers about $1 trillion in lost income from savings, checking, CDs and bonds since the beginning of the financial crisis, according to insurer Swiss Re.

Mortgages: Rates for fixed rate mortgages key off the 10-year government bond, not short term rates that the Fed controls. But yields on the 10-year have been creeping up, and on the day before the jobs report, Freddie Mac said that the average contract interest rate for 30-year fixedrate mortgages with conforming loan balances ($417,000 or less) increased to a 2017 high of 4.21 percent, up from 3.5 percent four months ago. After the jobs report, rate quotes were drifting up to 4.35 percent.

Adjustable-rate mortgages (ARMs) are linked to short-term interest rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate, to mitigate the risk of further increases in the future. Those who have ARMs could see payment increases down the road.

Auto loans: For those planning on purchasing a new car with a loan, don’t worry too much. An extra quarter-point increase on a $25,000 loan amounts to a few dollars a month in higher payments.

Credit cards: Most credit cards have variable rates, and the card companies are quick to pass along the increase to the borrowers within a few billing cycles.

Student loans: Federal loans are fixed, so there will be no impact from a rate increase, but some private loans are variable. Double check your paperwork to determine what benchmark rate (Libor, prime, T-bill) your loan is tied to.

Small business loans: Although specific terms of loans offered from the Small Business Administration (SBA) are negotiated between a borrower and an SBAapproved lender, the rate is based in part on different types of shortterm rates, all of which would be affected by higher fed funds rate.

Stocks: In the past, a rising interest rate environment was seen as a negative for stocks. The reason is that when rates are low, fixed income investments become less competitive and stocks become more appealing. But when rates creep up slowly and they do so because the economy is improving, stock prices tend to hold up. Stock prices are also influenced by conventional wisdom. Investors are expecting two to three rate hikes this year; if the Fed goes faster than expected, it could hurt share prices.

Bonds: When interest rates rise, bond prices fall, and in this cycle it could be even more painful because the low-yield universe lured many bond investors into low-quality and longer-duration holdings, which are susceptible to rising rates. That doesn’t mean that you should abandon the asset class. Most investors who own individual bonds will hold on until the bonds mature and then purchase new issues at cheaper prices/higher rates. For those who own bond mutual funds, they will reinvest dividends at lower prices and as the bonds in the portfolio mature, the managers will reinvest in new, cheaper issues with higher interest rates.