After almost a decade, the Federal Reserve increased interest rates from .25% to .5% this past December. The raise is a result of the U.S. Federal Reserve attempting to normalize economic conditions and regulate inflation. This change signals the end of the zero interest rate policy brought on as the result of the 2008 U.S. financial crash.
What does this mean for 2016?
Interest rates are predicted to increase slowly over the next two years. Fed Chair Janet Yellen stated “The first thing that Americans should realize is that the Fed’s decision today reflects our confidence in the U.S. economy.” As it stands the decrease in unemployment has not affected inflation. Should unemployment begin to affect inflation, the Federal Reserve may be inclined to increase the speed of rate changes.
This decision is likely to affect the rest of the world. Comparatively, the United States economy is still the world’s largest economy ($17,968 billion in GDP) with China as a close second ($11,385 billion in GDP). A rise in federal interest rates indicates a stronger U.S. dollar. While a stronger dollar is great for Americans seeking to purchase products in other countries, it also means that foreigners may be less likely to purchase goods from America given the increased exchange rate.
What does this mean for you?
As the bank short-term interest rate increases, the cost of a loan will also increase incrementally. JPMorgan Chase, Bank of America, Wells Fargo, and U.S. Bancorp raised their lending rate .25% in response to the Fed’s decision.
Other outlets likely to feel the effects of this decision include credit card rates and adjustable mortgage rates. While fixed rates including homeowners with fixed-rate mortgages and those with federal student loans remain the same.
Additionally, as interest rates gradually increase, the interest earned on savings accounts will yield higher returns. Although there will not be a drastic increase in returns, this is still good news for savers.
What does this mean to you as a hard money borrower?
Since hard money lenders source their funds from private investors, a change in the federal interest rate does not have a direct effect on hard money borrowers. However, effects of the rate change may cause competition amongst hard money lenders, and in turn affect your borrowing rate.
What does this mean overall?
All in all, if the Federal Reserve sticks to a slow and gradual interest rate increase your finances are unlikely to change much in the near future.