As a sign of increased confidence in the economy, the Federal Reserve increased rates by a quarter point to a new range of 2% to 2.25%.
That’s the third increase this year. The Fed felt comfortable doing so since unemployment is low. economic growth is strong and inflation appears to be stable for the time being.
"Our economy is strong," Jerome Powell, Chairman of the Federal Reserve, said at a press conference on Wednesday. "These rates remain low, and my colleagues and I believe that this gradual returning to normal is helping to sustain this strong economy."
And, should all go according to plan, we could see another rate hike by December 2018. Simply put, the Fed’s accommodative period appears to be over. Looking to 2019, we could see another three hikes.
Of course, that all depends on the continued strength of the economy.
So, what do the hikes mean for you?
While interest rates will move up on a broad range of borrowing, we have to remember that by historical standards, they’re still quite low.
For college loans, those taking out student loans will see a fixed 5.05% interest rate – up from 4.45%. That’s still lower than the 5.6% rate from 2009-2010, though.
Credit card rates are also sensitive to changes in the federal funds rate.
“Credit card rates will continue to rise in line with the Fed's rate increases, and if the Fed raises them again, the average household that carries monthly credit card debt will pay more than $150 in extra interest per year compared with before the rate hikes began,” says CBS News.
We’re likely to see higher mortgage rates, too. However, high mortgage rates could become a catalyst for more people to buy homes to secure current rates.
While higher rates will sting in some areas, there is reason to cheer. Savers will finally start to earn more on their cash. Though the average interest rate on a savings account is only 0.2%, some top-yielding savings accounts are as high as 2.5%, according to CNBC.
“Interest rates have been so low for so long that many people have fallen out of the habit of rate shopping,” commented Robert Frick, corporate economist for Navy Federal Credit Union, as quoted by Bank Rate. “But now that rates are rising, they should get back into the habit and will be seeing bigger payouts from their accounts, especially certificates of deposit. This is especially important for people on fixed incomes.”
As we move forward, higher interest rates will open new investing opportunities, as well.
We’ll share some with you in upcoming issues of The Cheap Investor.