Federal Reserve

How the Fed’s Interest Rate Increases Affect Your Finances

June 13, 2018 By Tamila McDonald Leave a Comment

The U.S. Federal Reserve Bank just raised interest rates a quarter of a percent. How does that actually work and at what point does it impact your finances?

Eight times a year, the Fed’s Federal Open Market Committee (FOMC) meets to discuss policy changes.

One of the main decisions the central bank faces is whether to change the interest rate imposed upon interbank loans, which is known as the federal funds rate.

Federal Funds Rate

At its core, the federal funds rate dictates the costs associated with one bank lending reserve funds to another. But, when this rate changes, it doesn’t just affect financial institutions; it impacts you too.

The federal funds rate can alter interest rates on products like mortgages, car loans, and credit cards. This occurs because it shifts the prime lending rate, which is the base amount banks charge consumers.

Here’s how the outcome of Federal Reserve meetings can ultimately impact the interest rates on debt you have now or that you might take on in the future.

Fixed Rate Debt

Whether you’ll see a change in your debt interest rates depends on one thing: whether your rate is fixed or adjustable.

Fixed-rate installment debts have interest rates that are largely set in stone. The loan contract outlines a specific interest rate, and that is what you’ll pay. This means, even if the federal funds rate goes up, you shouldn’t see a change.

In most cases, fixed-rate revolving debts, like credit cards, won’t change either. However, a bank can attempt to change your rate. Typically, they must notify you in advance and give you a chance to opt out. If you opt out, they may close your account, but it usually lets you avoid an interest rate increase on the amount you still owe.

Floating Rate Debt

An adjustable or variable rate debt is different, regardless of whether it is an installment or revolving form of credit. In most cases, the prime rate plus a specific additional amount, such as 5 percent, is what determines what you pay.

Since the prime rate is part of the ongoing calculation, if the Fed’s rate change impacts the prime rate, your interest rate shifts accordingly.

How Your Rate Will Change

What the Fed decides to do during their meeting determines if and how your rate will likely change. Just because the FOMC gets together that doesn’t mean they’ll change the federal funds rate.

If they don’t change the rate, then your adjustable interest rates will probably stay the same. Similarly, your rates will rise if they increase the federal funds rate.

The Federal Reserve can also lower the federal funds rate. When this happens, if your interest rate is tied to the prime rate, you may end up paying less in interest.

Obtaining New Credit

The federal funds rate has a significant impact on interest rates for new forms of credit. In fact, just the anticipation of a rate change can cause banks to change their offerings.

If they expect the federal funds rate to go up, banks may increase their interest rates on new accounts in advance. This lets them offset the rising cost, even though it hasn’t yet come to pass.

Similarly, if they anticipate a decrease, new accounts may have lower interest rates. And, if the federal funds rate isn’t likely to change, banks may keep their rates the same.

Ultimately, understanding how the Federal Reserve meetings and federal funds rate impacts you helps you make smarter credit decisions. Now, you know how a rate change can affect your existing debts, as well as any new accounts.

Do you worry about rising interest rates after Federal Reserve meetings? Tell us about it in the comments below.

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Labor Department Says Economy Created 280000 New Jobs in May

June 7, 2015 By Lori Kelley 3 Comments

The Labor Department says job numbers increased 280,000 in May

The economy appears to be in better shape than many economists had thought. The Department of Labor released the monthly jobs report which featured strong numbers for May. The report showed US businesses added 280,000 new positions for the month, more than the 220,000 jobs economists had anticipated.

At the same time, the unemployment rate increased to 5.5% from 5.4%, which had hit a seven year low last month. While an increase in the unemployment rate seems counterintuitive with the increase in the number of jobs for the month, there seems to be a pretty straightforward explanation. Economists believe with more jobs available and the end of the winter season cold, more people in the US are once again looking for work, increasing the number of people actively looking for employment.

This is especially good news since the job growth numbers for the first quarter of the year had been lower than predicted. Job numbers for January, February and March had been lower than had been anticipated, which had economists questioning whether or not the economy was recovering. The latest numbers give economists hope they were an aberration due to harsh winter weather, rather than a trend and something to worry about long-term.

The numbers are good for both employers and employees. They show businesses are in need of labor, and this is leading to a slight increase in the wages employees are earning. Economists are predicting the job market will remain strong with good job growth numbers through the end of 2015.

There are some numbers hidden in the good news that may make some economists pause. A broader unemployment definition which includes part-time workers looking for full-time employment, and the long-time unemployed people who would like to work, but have given up finding a job has not shown signs of improvement. That rate remained steady at 10.8 percent, something economists would have liked to seen drop with the improving economy.

With a sense of relief with the May numbers, the next date economists will be eyeing is June 17. This is when Federal Reserve Chair Janet Yellen will give her thoughts to the press on where she feels interest rates should be.With interest having been near zero for a long period of time in hopes of stimulating the economy, the new numbers may help her decide it’s time to raise them a bit. If she does, it will be a sign that the Federal Reserve is confident the US economy is in a strong position and it has moved on from the Great Recession.

(Photo courtesy of MITD Gallery)

Strong December Jobs Report Looks Good, but Wages Fail to Keep Pace

January 9, 2015 By Lilian Nwa 3 Comments

Job report is best in 15 years, but wages still lacking

The years 2008 and 2009 were characterized by loss: the loss of approximately 8.4 million jobs, the loss of consumer confidence in the markets, as well as steep declines in the values of homes. What did increase were the federal debt, inflation, and the numbers of personal bankruptcies filed by individuals. Eventually, the economic decline in world markets reached its bottommost level, and ‘loss’ in its many manifestations (i.e. job, home, savings) became the status quo.

Nearly five years later, however, economists have declared 2014 the best year since 2009. According to the Christian Science Monitor, 200,000 jobs were added each month during 2014 in what the Wall Street Journal called the “best year of job growth in 15 years.” Additionally, the New York Times reported that many of the recently created jobs are higher-paying opportunities in industries that have been especially aggressive in hiring, such as health care and construction work. Overall, between 2013 and 2014, the unemployment rate decreased over a full percentage point, to hold at 5.6 percent in December 2014.

Despite this good news, researchers have cautioned against reading the report through a rose-tinted lens. In particular, despite this year’s robust job growth, hourly earnings in December rose only 1.7 percent compared to this time last year, barely above inflation rates.

The result of this mathematics is firms are able to collect and protect their profits, while many U.S. households will be unable to increase their living standards. In fact, Federal Reserve officials have used this data to suggest that the economy is “far from its full capacity,” though the dollar has been at its highest point in years, another sign of economic improvements. As Elise Gould tells SF Gate, “…we are still digging our way out of the recession, and wage growth remains stagnant and untouched by recovery.”

But 2014 is gone and some analysts believe that 2015 will be “the year of the consumer,” given declining oil prices and the lower costs for imported goods. In fact, an economist questioned by SF Gate likened the lower oil prices to a $1000 pay raise, if prices remain low. Additionally, Mark Znadi, chief economist at Moody’s Analytics, told the New York Times that as the economy heads toward a 5 percent unemployment rate, wage growth is also expected to increase.

Millions of Americans, however, are still searching for full-time employment, while others have dropped out of the labor force altogether. As Dan Greenhaus, chief strategist at the brokerage firm BTIG told WSJ, “The simple fact is we cannot consider an employment report a success…if wage data does not begin to accelerate” as well as the number of Americans with work.

(Photo courtesy of Tess Aquarium)

US Stocks Fail to Secure Wall Street Gain for Sixth Week in a Row

September 13, 2014 By Jeffrey Strain Leave a Comment

US stock indexes deacrease for first time in six weeks

The winning streak couldn’t last forever, and US stocks finally hit a small speed bump on Friday and closed lower for the first time after five weeks of gains and record highs. The good news is that the retreat in stock prices looked more like a short rest from the record highs rather than a full on retreat, falling mainly due to some weakness in energy shares and raising bond shares hitting stocks which pay high dividends.

The Standard and Poors 500 Index (S&P 500) fell 11.91 points (0.6%) on Friday to end the week at 1,985.54 and failing to maintain the psychological 2,000 point level it had inched across in previous weeks. The index was down 22.17 points (1.1%) for the entire week.

The Dow Jones industrial average decreased 61.49 points (0.36%) on Friday, ending the week at 16,987.51. Much like the S&P 500, the Dow failed to maintain the psychological 17,000 point level it had recently risen above. For the week, the Dow ended down 149.82 points (0.9%).

The Nasdaq composite made it a clean sweep of decreases for the major stock indexes as it fell 24.21 points (0.53%) on Friday to 4,567.60 points. That was a decrease of 15.30 points (0.3%) for the week.

Energy stocks took a big hit during the week, falling 3.7% on falling oil prices. On Friday alone, Exxon Mobile fell 1.3% while Conoco Phillips was down 1.2%. While the decrease in oil prices is bad news for oil stocks, consumers are seeing lower gas prices. After hitting a high of about $3.70 a gallon during the summer, the average gas price has fallen steadily, and some people are speculating it may even find its way to $3.00 a gallon in the not too distant future.

Another sector that had a bad week were the S&P utilities, which decreased 1.8% on Friday. Utilities are a place where traders often seek shelter when bond yields weaken due to the high dividends many of them pay. This week those traders did the opposite as US bond yields had their largest increase during the week in more than a year.

There’s also growing speculation among traders that the Federal Reserve is inching toward raising interest rates at a quicker pace than previously speculated. This came from retail sales and consumer confidence data released on Friday. As the economy gains strength, the likelihood of a raise in interest rates increases, making borrowing for companies more expensive. A Fed policy meeting next week should show whether or not these current fears are founded or not.

(Photo courtesy of Alan Kotok)

Americans Love Debt Again: Consumer Credit Card Spending Surges by $8.8 Billion

June 7, 2014 By Jeffrey Strain 2 Comments

consumer revolving and non-revolving debt surges

Consumers seem to have forgotten their lesson that debt is not their friend. In what might be a positive sign for the economy that consumer spending is increasing, the April data from the Federal Reserve isn’t good news for those who hoped Americans would learn to be more responsible with their personal finances.

The Federal Reserve reported Friday the total amount of consumer credit had increased $26.85 billion to a total of $3.18 trillion, a rate much higher than most analysts had predicted. It was also a large increase from the $19.5 billion increase recorded in March. Those numbers indicate consumer debt is now increasing at a 10.2% annual rate. This is the fastest growth in consumer debt since July 2011. Most of this came from non-revolving credit, the type which includes auto and student loans, which increased by $18 billion in April.

The numbers were even worse when it came to credit card debt. The Federal Reserve reported revolving credit, the type which measures the use of credit cards by consumers, increased by nearly $9 billion ($8.8 billion). This means that credit card debt is now running at a 12.3% annual rate gain, a number not seen since just after the September 11, 2001 terrorist attacks when consumers were being urged to spend more in an attempt to help improve the economy.

The fundamental personal finance principle for credit card use is to never actually borrow money on the cards. That is, any purchases placed on a credit card should be paid off in full when the bill comes so that you don’t end up paying the double digit interest rates which come with credit card loans. While consumers racking up credit card debt might help the economy short-term, it hurts it long-term, as those consumers must pay money as interest to credit card companies rather than spending the money to buy other goods.

For those who do have any type of consumer credit card debt, the best course of action they can take is to begin to pay it off as soon as possible. One of the best ways to do this is to set up a debt snowball to begin paying it off. In addition, it’s important to put in place a strategy to build an emergency fund so they can avoid further credit card debt in the future.

The increased willingness of consumers to borrow on credit cards shows many still fail to understand the high cost of making purchases with borrowed money. Interest rates can significantly increase the cost of any product or service which is purchased on a credit card, and not paid off in full at the end of the month. Credit card debt also makes it difficult for most people to reach their long-term financial goals as they are forced to pay off the debt rather than invest the money toward their future financial goals.

Until becoming debt free becomes a priority for Americans, rather than buying things they don’t currently have the money for, there will continue to be a personal finance crisis in this country. As the latest data shows, it doesn’t seem becoming debt free is a priority for many.

(Photo courtesy of Sean MacEntee)