What Federal Reserve Rate Hikes Mean for U.S. Households

The Federal Reserve (the Central Bank for the United States) can set short term rates and influence long term rates. Any rate moves occur during its meetings (in 2018, June 12-13, July 31-Aug. 1, Sept. 25-26, Nov. 7-8, and Dec. 18-19). Analysts expect 2-3 rate increases in 2018. Orion’s brokers know that most people will see at least a minor impact on their credit card statements in the next few billing cycles, while those with adjustable-rate mortgages, home equity lines of credit, auto loans and other loans with variable rates of interest will be hit hardest. Credit cards with fixed interest rates and annual percentage rates that have a period of unchanged won’t be immediately affected.

Our brokers also know that fixed-rate mortgages are also going to become more expensive, which could have a chilling effect on the real estate market. Higher interest rates typically depress home values by making monthly mortgage payments more expensive. The Fed lifted its benchmark overnight lending rate to a range of 1.50 percent to 1.75 percent. The U.S. central bank also forecast at least two more hikes for 2018, signaling growing confidence in the strengthening economy, which could lead to more aggressive future tightening.

U.S. economic strength is evident with the unemployment rate at a 17-year low and companies receiving windfalls from President Donald Trump’s tax cuts, which they may reinvest to create jobs and improve wages. But U.S. wage growth has remained sluggish and household budgets are tight. There is evidence in rising debt levels: American households owed a record high total of $13.15 trillion at the end of 2017, according to data from the New York Fed. If wages don’t rise as rate hikes mount, contracted spending could eventually lead to a broader economic slowdown.

Is there any good news for Orion’s brokers, and their clients, with rate hikes? Savers benefit as yields on savings accounts and certificates of deposit edge higher. The average national savings account interest rate was 0.6 percent before the Fed began raising rates in 2015, according to FDIC data. It is now 0.7 percent - so good for savers, not so good for borrowers.

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