How higher interest rates will affect you in 2016
When the Federal Reserve hiked interest rates this month for the first time in nearly a decade, Fed Chair Janet Yellen said the takeaway for the average American is the U.S. economy is improving.
"The first thing that Americans should realize is that the Fed's decision today reflects our confidence in the U.S. economy," she said in a news conference. "While things may be uneven across all regions of the country, we see an economy on a path of sustainable improvement."
Beyond the psychological signal, the Fed's unanimous decision to increase its key federal funds rate to 0.25 percent -- up from at or near zero percent -- changes what banks charge each other for overnight loans. Because banks and other lenders use the Fed benchmark to determine the rate on loans from mortgages to credit cards, consumers will see a difference, albeit a small one.
Shortly after the Fed's rate decision, major banks including Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and U.S. Bancorp (USB) announced hikes in their prime lending rate, from 3.25 percent to 3.50 percent.
After years of making little return on loans, banks are expected to raise rates on loans more rapidly than on deposits. So, savings accounts that currently earn a fraction of a percent in interest are unlikely to pay more anytime soon, analysts said.
"You'll start to see interest on savings going from nothing to slightly more than nothing if the Fed keeps raising rates," said David Lafferty, chief market strategist at Natixis Global Asset Management. He believes the Fed will hike two to three times, or another roughly 75 basis points, in 2016. Money market accounts, certificates of deposits and savings accounts "will start to pay something, so that's good news," he said.
"Credit cards, or anything tied to the prime rate, likely goes higher as the Fed hikes," said Andrew Henry, chief operating officer at CreditIQ, which specializes in consumer loans. "It won't have an effect on mortgages -- that has more to do with the bond market."
Credit card rates are likely to rise within a couple of billing cycles, while federal student loans involve fixed rates and won't be affected. Homeowners with fixed-rate mortgages won't see any change in their monthly payments, but a borrower with an adjustable-rate mortgage is likely to see an increase at the next adjustment.
"If you have some kind of variable-rate loan, it may be time to refinance," advised CreditIQ's Henry.
Mortgage rates, which had inched higher in anticipation of the Fed move, were largely unchanged in the most recent Primary Mortgage Market Survey by Freddie Mac, which found the 30-year fixed-rate mortgage averaged 3.96 percent in the week ending Dec. 24, down slightly from the previous week.
"Long-term interest rates will not spike in response to the Federal funds rate increase," said Sean Becketti, Freddie Mac's chief economist, in a statement. "While we expect the 30-year mortgage rate to be above 4 percent in early 2016, we anticipate rates will gradually increase, averaging 4.4 percent for the year."
Car buyers are also unlikely to feel a short-term impact from the Fed's rate hike, said Jessica Caldwell, director of industry analysis at Edmunds.com. She believes automakers will spend money to subsidize low rates, which have been credited for helping auto sales score what's expected to be a record year in 2015.
"We don't expect auto loan rates to rise in the near term, especially with automakers continuing to offer successful low-APR promotions," said Caldwell. "More and more shoppers have been drawn in by these low interest rates. So, as long as they continue to respond to these deals, automakers will do everything in their power to continue offering them."