On December 16, 2015, the Federal Reserve raised the rate it charges for loans to commercial banks from 0.25% to 0.50%. Do you need to do anything about it?
Fed Raises Rate. Should You Care?
The answer depends on your situation:
If you’re looking for a new credit card company, now’s a good time to take advantage of “zero percent” offers, because credit card rates will probably go up.
If you have an adjustable-rate mortgage, it may be wise to consider switching to a fixed-rate mortgage--not because of the measly quarter-point increase, but because Federal Reserve officials have talked about raising their rate to 1.0% by the end of 2016 and perhaps more in the years ahead.
That’s important, because when banks and other financial institutions have to pay more to get money, they often charge more to lend money. So increases in the Fed rate could prompt banks to bump up the payments for adjustable rate mortgages.
Other than that, there’s not much that most people need to do at this time. There’s currently no need to shift additional funds to savings accounts or Certificates of Deposit, because banks have plenty of cash. So don’t expect them to pay more for your money.
If the Fed continues to raise rates, bonds and bond funds will be affected. As rates for new bonds go up, the price of old bonds goes down. This effect is significantly offset in a bond fund, because a fund will gradually acquire bonds that pay higher rates.
At the bottom of all this is an unknown future. The Fed is not committed to raising rates. Based on what Fed officials were saying in December, 2015, they will instead follow a policy of “raise and observe,” meaning they will continually monitor the effect of higher rates on unemployment and business activity. If it looks as though a higher rate will produce an unfavorable effect on such factors, the Fed will probably hold its fire.