Fed Hikes Key Interest Rate for 2nd Time in a Decade
An incremental hike is not likely to affect most wallets.
— -- The Federal Reserve hiked its key interest rate by 0.25 percent point today, the first such increase in a year. The target interest rate is now 0.50 to 0.75 percent, increasing from a range of 0.25 to 0.50 percent.
The decision was widely expected by investors, who have been speculating for months about when the Fed would increase rates.
Before last year’s increase (from a range of 0 to 0.25 percent), the Fed had kept interest rates low in an effort to boost the economy amid the Great Recession and its aftermath. Before December 2015, it last raised the rate in June 2006.
In a statement the Federal Open Market Committee — the body in charge of adjusting the key borrowing number — said it "expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further."
The Fed also indicated that it could hike rates as many as three times next year.
“It is a good sign that the Fed is increasing rates,” Moody’s Analytics chief economist Mark Zandi told ABC News. “They are increasing rates because the job market is strong, unemployment [is] low, wage growth is picking up and inflation is getting back to their target.”
“It is an indication of a healthy economy that the Fed feels comfortable increasing rates back to something more typical,” he said.
Your Bottom Line
Average Americans are likely to be affected most directly by higher loan rates, according to Zandi. “Rates will rise on credit cards, home equity loans, auto loans and adjustable rate mortgages,” he said.
While the cumulative effect of several hikes in the future could significantly affect the average consumer, today’s increase is likely to have a minimal effect, according to BankRate.com chief financial analyst Greg McBride.
“Rising rates have a minimal effect on car loan affordability, with a quarter-point move making a difference of $3 per month on a $25,000 car loan,” he said.
For those who remain concerned, he advises that they should “shop around for the best financing, negotiate the price of the car, negotiate your trade, but don’t sweat rising interest rates.”
On the bright side, higher interest rates in theory provide a boost to savings accounts.
But just as the incremental hike is not likely to affect borrowers very much, savers shouldn’t expect a big payday either.
“Savers should have low expectations, as many banks will try to hold the line on savings rates,” McBride said.
He advised that savers “seek out the top-yielding accounts offered by online banks, community banks and credit unions, as this is where the best returns will be found and a better likelihood of seeing higher rates passed along.”
For those with investments or retirement accounts wrapped up in the market, there is, likewise, little to worry about, according to Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management in Seattle.
Markets have been rallying since the election, and investors fully expected today’s hike, so the possibility of a jolt in stock prices is minimal.
“The rise in rates was well anticipated by markets, and the key will be future communications from the Fed around next steps,” Haworth said. “Market watchers in general appear to be expecting a couple more rate hikes in 2017.”
He continued, “A more hawkish tone from the Fed could limit further stock price gains, while a more dovish tone would generally be constructive for equities.”
Related Stories
ABC News Live