Recently, the Federal Reserve raised interest rates for the third time since the financial crisis, and many Fed watchers agree that additional hikes are on the horizon.
This represents a change. The Fed lowered its key federal funds rate to zero in December 2008 to help revive the collapsing housing market. Since then, however, consumers have become accustomed to lower interest rates: those who bought homes and cars paid less in interest, as did those who carried credit card balances. But our cash investments didn’t generate much in the way of income.
So, how might increased rates affect you?
Cash equivalents may pay more interest. American savers struggled for years, earning little interest in their savings account and certificates of deposit (CDs). When the Fed raises interest rates, banks generally pay customers more interest on deposits.
Mortgage rates are now rising, but remain low. In fact, a Fed rate hike does not automatically mean mortgage rates will rise. At times, the Fed has raised rates and mortgage rates have fallen, although this is unusual. You can expect higher (but not yet game-changing) interest rates on mortgages and other big-ticket items in the future.
The stock market could tremble. Stock markets used to swoon at the mere hint of a Fed rate hike, as rate hikes increase the cost of borrowing for companies and strengthen the U.S. dollar (which in turn makes U.S. products more expensive and thus less attractive to foreign buyers). The March 2017 increase was widely expected and didn’t impact the markets significantly. However, future increases may.