The interest rates that shape the economy and your portfolio are increasing again.
As expected, interest rates are on the rise again. Federal Reserve Chairman Jerome Powell, the nation’s top financial policy maker, and the Federal Open Market Committee (FOMC) voted on June 13 to raise rates by 0.25 percent. Known as the Federal Funds Target Rate, it sets the basis for what banks charge other banks to borrow money, and is the starting point for many consumer-facing interest rates like credit cards and auto loans. The quarter-point hike sets the target rate between 1.75 percent and 2 percent.
To spur growth after the Great Recession, the FOMC kept rates near zero for seven years before beginning to increase them once again. In raising rates for the second time this year, the FOMC again cited improvements in the job market and solid economic growth. “The economy is doing very well. Most people who want to find jobs are finding them, and unemployment and inflation are low,” Chair Powell said in a press conference after the announcement.
Interest rates deeply impact Main Street. Here are four of the most common ways rising rates could impact you.
- Mortgages and vehicle loans – If it’s more expensive for banks to borrow money, that extra cost will likely be passed on to the consumer. Now that the Fed has hiked interest rates again, house hunters and car buyers should expect to pay a little more in interest.
- Bond values – Generally when interest rates rise, yields rise and the price of existing bonds fall on the resale market. If held to maturity, the full principal value of the bonds is returned subject to the creditworthiness of the issuers.
- Student loans – Most student loans issued by the federal government are tied to the 10-year Treasury note, a debt instrument issued by the U.S. Treasury department. Here too, higher interest rates mean you’ll pay more to borrow money for school.
- Savings accounts and CDs – This is one area where higher interest rates are good news for consumers. With rates increasing, you’ll eventually earn more interest on your savings. Interest rates on CDs are usually fixed at the time of purchase.
Contact your financial advisor for more information on how interest rates play a role in your investment portfolio.