Within minutes of the Fed’s decision Wednesday, Wells Fargo, JPMorgan Chase and US Bancorp became the first banks to announce that they would increase their prime rate, a rate used for consumer loans like mortgages. Effective December 17, the prime rate at Wells, JPM and US Bancorp will move from 3.25% to 3.5%. Later in the afternoon, Citibank announced a similar move; many other banks are likely to follow suit.
Yet despite this and despite all the hubbub surrounding the Fed’s decision – journalists and Fed watchers have literally been talking about a rate hike for years – the immediate impact to consumers’ wallets will be virtually indiscernible. Fed chair Janet Yellen even said as much in her Wednesday afternoon press conference.
It is a very small move. It will be reflected in some changes in borrowing rates. Longer term interest rates, loans that are linked to longer term interest rates, are unlikely to move very much,” Yellen said. “For example, some corporate loans are linked to the prime rate, which is likely to move up with the Fed Funds rate, and those interest rates will adjust. I think credit card rates that are linked to short-term rates might move up slightly. But remember, we have very low rates, and we have made a very small move.”
Put another way: ”The impact of a single quarter-point interest rate hike is virtually inconsequential. You won’t notice it,” said Greg McBride, chief financial analyst at Bankrate.com. “But: this could be the start of a series of interest rate hikes, and the cumulative effect of those could be significant over the course of the next couple of years.”
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Here’s a look what exactly all of this means for each facet of your wallet:
Student loans. If you have a fixed-rate student loan — which you do if you borrowed from the federal government after July 1, 2006, or locked in a fixed-rate private student loan — Wednesday’s decision means nothing to you. Your rate will stay the same.
If you have a variable-rate student loan, you will see your rate start to fluctuate. Assuming you have a variable-rate loan that bases its rate on LIBOR (the London Interbank Offered Rate), this fluctuation will occur on a monthly basis. And whether or not this uncertainty scares you enough to refinance your loan into a fixed-rate depends on both your tolerance for risk and the duration of the loan you hold.
“If you have a variable rate, you’re taking on the uncertainly of how the Fed will raise rates and by how much,” explained David Klein, CEO and co-founder of alternative lender (and student loan refinancer) CommonBond. The Fed did not indicate on Wednesday when it will raise rates again — but, Klein explained, if you hold a 10-year variable rate loan, you’re exposed to much greater uncertainty than someone who holds a two-year variable rate loan. “Rate movement is more restricted [over two years] than the movement and uncertainly you’d see over 10 years,” he said.
For more on how the Fed’s decision affects student loans, check out this article here.
Mortgages. The rules for mortgages are roughly the same as those for student loans: if you have a fixed rate mortgage, you needn’t worry. If you have yet to take out a mortgage but plan to do so in the future, you will receive a slightly higher rate than you would have if you had locked in your rate during 2015 (or 2014, or 2013… you get the point). And if you have an adjustable-rate mortgage, you will see your rate go up.
Bankrate’s McBride noted that adjustable-rate mortgages only adjust once per year — so it’s not as if you will see your payments fluctuating on a monthly basis. However, this means that “the Fed could raise rates two or three times becore your rate adjusts. Then you’re looking at a significant rate increase,” McBride said. In his view, folks who have an adjustable-rate mortgage would be best served by locking in a low fixed rate while they still can — i.e, before the Fed makes further changes to interest rates.
“That’s the urgency now,” he said. “That adjustable rate mortgage at 3%, which could easily be at 5% in a couple of years, you could trade that away for a fixed-rate mortgage at 4%.”
Savings accounts. McBride has some bad news for every consumer who is hoping the rate increase will bring a commensurate increase to the interest rates applied to savings accounts.
“We are not going to see an improvement right off the bat,” he said. “A lot of banks are sitting on a pile of deposits, and their margins have really been squeezed by low rates. So the incentives for banks is to pass on higher rates on loans but not deposits so they can breathe some life into that margin.”
There is a smidge of silver lining: McBride said that high-yield savings accounts — i.e, those that offer a rate of 1% or more — are likelier to raise their own rates. “Not only are you likely to benefit now, you are likely to benefit down the road.”
Credit cards. If your credit card agreement says something to the effect of “APRs will vary with the market based on the Prime Rate,” you will likely see your rate go up by 0.25%.
“Credit cards are the standout category where we can expect interest rates to rise, but we estimate the impact will be relatively small,” said Sean McQuay, NerdWallet’s credit card expert. On a dollar-for-dollar basis, change does not translate to significantly higher payments, he said. ”NerdWallet has done the math and found that the average indebted American household can expect to spend an additional $125 in credit card interest over the next five years. While that’s still real money, this shouldn’t significantly impact your financial standing.”
Bankrate’s McBride also noted that the rate hike will also mean fewer credit card promotions that offer a 0% APR for a long introductory period (like, say, 18 months).
“As the Fed moves away from 0% interest rates, eventually credit card issuers will do the same,” McBride said. The key word, though, is eventually. “It’s not going to happen overnight. As rates go up, the rates on the offers you see will go up,” he said. “Or, the promotional time period in which the offer is good will shrink. The 0% offers for 18 months that are out there now? They won’t be around a year from now.”
HELOCs. If you have a home equity loan (also known as a home equity line of credit, or HELOC) and are in the interest-only portion of your loan, your monthly payment will get higher with a rate hike. But as with virtually every other item on this list, the increase should not break your back.
“An increase in 25 basis points is only going to cause customers’ monthly payments to go up about $10 to $11 per month” assuming it’s a $50,000 HELOC, explained Mike Kinane, head of mortgage and consumer lending products at TD Bank. “That’s not cause for triggering a refinance. Rates are still historically low.”
Kinane emphasized that though home equity contracts are typically written using the Wall Street Journal prime rate (which, in turn, is affected by the Federal Funds rate), it’s best for consumers to look at their contract so they can see exactly how the rate will affect their payment.
Your portfolio. In short, the Fed’s move is bad news for bonds, mediocre news for the equity markets and, according to one expert, good news for commodities and stocks relating to consumer goods, food and utilities.
According to Dr. Robert Johnson, the president of the American College of Financial Services, the bond market will move according to simple math: “as interest rates rise, existing bond prices fall, because newly issued bonds have higher yields.”
On the equity market front, the picture is mixed. For his book “Invest with the Fed,” Johnson (along with Gerald Jensen and Luis Garcia-Feijoo) studied a 48-year period of equity market returns and found that stocks performed significantly better in a falling-interest-rate environment than a rising rate environment. ”Over 48 years, the S&P 500 returned 15.2% per year when interest rates were falling, and returned only 5.9% when interest rates were rising,” he said.
Though the Fed’s decision had an immediately negative effect on oil Wednesday — the price of crude oil dropped 4.5% in late Wednesday trading — Johnson said that his research has shown that commodities performed “dramatically” higher in rising rate environments than in falling rate environments. He’s also found that the stocks of consumer staples, food and utility companies tend to do well in rising rate environments, because “people have to heat their homes, brush their teeth and buy gas for their cars no matter what conditions the markets are in.”
WASHINGTON, DC – DECEMBER 16: Federal
Reserve Bank Chair Janet Yellen holds a news conference where she
announced that the Fed will raise its benchmark interest rate for the
first time since 2008 at the bank’s Wilson Conference Center December
16, 2015 in Washington, DC. (Photo by Chip Somodevilla/Getty Images)
Culled Forbes
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