The U.S. Federal Reserve (Fed) has refrained from raising interest rates, but eventually it will do so, perhaps even by the time you read this. And whatever the timing, a hike will affect millions of Americans in many ways.
The Fed cut its target for interest rates to zero in December 2008 to help stimulate the economy as it struggled in the depths of the Great Recession.
But the economy is in much better shape now, and keeping interest rates low for too long can cause other problems. So many expect the Fed to act soon.
A rate hike won’t affect you overnight, but eventually, it will – particularly if you use a credit card, have a savings account, invest in the markets, or want to buy a home or car.
Consider mortgages. The average interest rate on a 30-year fixed-rate mortgage has been hovering around 4 percent, down from 6 percent 10 years ago and 7.5 percent 20 years ago, according to the St. Louis Fed. So if you’re in the market for a mortgage (or other kind of loan), you may want to act sooner rather than later.
Bondholders may also be disappointed. As interest rates rise, new bonds will be issued with higher interest rates, making older bonds with lower interest rates less valuable. Of course, if you hold your bonds to maturity, you’ll still get face value.
Stock markets also may be more volatile. In many cases, a rate hike will cause investors to pull their investments out of developing economies and put their cash in what they perceive to be safer assets such as U.S. government bonds.
So if you own stocks or stock funds, the months around a rate hike could be turbulent.
Savers, however, may have reason to smile. If you’ve worried about low interest rates on your savings accounts and certificates of deposit (CDs), these will begin to move in a more positive direction.