(TNS)—Consumers tend to pay far more attention to the swings in their March Madness brackets than the latest moves by the Federal Reserve. The reality is the Fed’s action will have a more lasting impact on your wallet.
The Fed moved to raise rates by 25 basis points, as expected. The Fed’s benchmark interest rate increases to 1.5 percent to 1.75 percent.
“Job gains have been strong in recent months, and the unemployment rate has stayed low,” the Fed said in its statement. “Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings.”
Going forward, consumers will continue to see an uptick in the cost of borrowing on everything from credit cards to car loans to mortgages.
This is the first rate hike of 2018 but it’s not the last, according to economists. Another two or three rate hikes are anticipated for this year, according to Robert Dye, chief economist for Comerica Bank.
“Higher interest rates are negatives for most households,” Dye says.
The U.S. economy has much going for it on the upside—strong job growth, rising home values, some wage growth and higher consumer confidence, and a federal tax cut that is putting more money in many wallets.
“I think the positives will outweigh the negatives this year and we will see a strong year for non-auto consumer spending,” Dye says.
Here are some things to pay attention to now in a rising-rate world:
- Budgets, unlike college basketball brackets, aren’t likely to be busted.
The theory is that the Fed has room to raise rates because the job market is so strong. As wages rise, consumers may not be under so much pressure to borrow or they’d be able to afford slightly higher rates.
Rates are expected to climb gradually, so consumers still have time to refinance or borrow earlier in the year to avoid higher rates later on down the road.
Mark Zandi, chief economist for Moody’s Analytics, says his expectation is that mortgage rates and car loan rates will be up by at least a half a percentage point a year from now. For savers, new CD rates are expected to be about a quarter percentage point higher a year from now.
“The economy is set to boom,” Zandi wrote in a report this week. “Growth is already strong—well above the economy’s potential—and will soon accelerate. A massive dose of fiscal stimulus measures, including both deficit-financed tax cuts and federal government spending increases, has just begun to hit the economy.”
- Consumers aren’t stressing out.
Policy wonks and bankers keep a close eye on all things Fed, but a recent NerdWallet survey indicated that 62 percent of respondents claimed that they didn’t know the Fed raised rates last year. The Harris Poll on behalf of NerdWallet surveyed 2,000 U.S. adults ages 18 and older.
As of the last hike, the Federal Reserve will have raised rates six times since December 2015. The Fed raised rates three times in 2017, once in 2016 and once in 2015.
- Borrowing costs aren’t sky-high.
Mortgage rates rose for a good part of 2018 on strong jobs reports. The average 30-year fixed rate has gone up to 4.54 percent from 4.15 percent in early January, according to Bankrate.com.
“Borrowing costs are still relatively low, but moving higher and that’s why consumers need to get out of variable-rate debt and lock in fixed rates to insulate themselves from further increases,” says Greg McBride, chief financial analyst for Bankrate.com.
McBride says he’s expecting mortgage rates to remain around 4.54 percent by year-end, but he’s expecting plenty of volatility. At some point, mortgage rates could drop significantly if geopolitical issues arise or the U.S. economy slows down.
As for other rates, McBride says he’d expect the average five-year car loan rate to be 4.85 percent by year-end, up from 4.46 percent now.
Consumers aren’t seeing anything close to the average 8 percent for a car loan consumers faced in January 2006, according to Jessica Caldwell, executive director of industry analysis for Edmunds.com.
Savers are likely to see higher rates, too. McBride expects the average rate on a one-year CD to be 0.7 percent by year-end, up from 0.49 percent now. The average rate on a five-year CD is expected to be 1.5 percent by year-end, up from 1.10 percent now.
- Ignoring the trend toward higher rates won’t help.
As rates edge higher, savvy consumers will want to take extra care to shop around for loans and CDs.
Making sure to pay bills on time—and not get overburdened with debt—will help keep credit scores higher and borrowing rates lower for individuals.
The average rate for credit cards is the highest ever, at 16.84 percent—and those rates would edge even higher once the prime rate goes up, according to McBride.
“But consumers with good credit can still get 0 percent offers for purchases and balance transfers that last as long as 15 months,” McBride says.
The key, of course, involves maintaining a strong credit score.
Charlie Chesbrough, senior economist for Cox Automotive, notes that rates on car loans are near five-year highs, but rates remain relatively affordable, particularly for those with good credit.
“Higher lending costs impact car buyers in different ways,” Chesbrough says. “For customers with good credit, the monthly payment on a $35,000 five-year car loan will rise about $15 a month from a 1 percent interest rate increase.”
Consumers with lower credit scores are seeing much bigger rate hikes on the car loans they’re taking out.
“Assuming a continuation of credit tightening, subprime borrowers will see much larger cost differences,” Chesbrough says.
- Consumers can control some borrowing costs.
Most credit cards have variable rates and the interest rate goes up every time the Fed raises rates. Most home equity lines of credit have a variable interest rate that’s tied to the prime rate. The prime rate goes up when the Fed raises short-term rates.
“Variable-rate debt, such as credit cards and home equity lines of credit, will only cost more as interest rates rise,” McBride says. “Transfer balances to low-rate cards, refinance into a fixed-rate home equity loan, or just pay down the debt aggressively—but do it now.”
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