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By Al Jacobs
This article’s headline inspires thought about a pertinent question: “What does the Fed rate increase mean to you?” From this point on, it’s anyone’s guess as to its significance for each of us. In case you’re not aware, on Dec. 13, 2016, the Federal Reserve boosted the key interest rate by a modest 0.25 percent—the first increase since December 2015, which was itself the first in a full decade. This 25-basis point hike now puts the federal funds target rate between 0.05 percent and 0.75 percent. With the official U.S. unemployment rate toying at 5 percent for more than a year, the Fed held off hiking rates on the fear such action would spur undesirable inflation. But now, with Fed Chair Janet Yellen’s hint that several 2017 rate increases may be in the offing, it appears rising interest rates are off and running.
I’ll now repeat the question—what does it mean to you? The answer is not an easy one; it depends upon who you are and where you fit into the economic structure. Let’s presume you’re a typical consumer who makes purchases on your credit card and carries over a balance from month to month. If the 2015 rate increase is any guide, you’ll soon find an additional quarter percent increase tacked onto your payments. Before we leave this topic, let me suggest you pay the full unpaid balance on your credit card each month so you’re charged no interest. That’s the way to go.
For you homeowners with a mortgage, if your loan has an adjustable rate, an increase in both rate and payments are in store for you. And if Ms. Yellen’s avowed future increases come to pass, you might check in to see if a change to a fixed rate loan is possible while rates are still at near-historic lows. I can only wish you good luck.
Finally, did I come across someone with an interest-bearing money market account, or a bank savings account? To you, I can only offer condolences. Sorry, but a rate increase won’t help you. The financial institutions discovered some years ago that average depositors needn’t be compensated in any way. After all, where else can they put their dollar bills? It’s for this reason your Chase Bank savings account pays one-hundredth of one percent per annum, with most of the others not much better.
A final thought: On average, things aren’t so bad for most of us. With interest rates well below those of the past, we can live life a little more cheaply and a little less frantically. So, enjoy while you can.
Al Jacobs, a professional investor for nearly a half-century, issues a monthly newsletter in which he shares his financial knowledge and experience. You may view it on www.roadwaytoprosperity.com.