The Federal Reserve left the federal funds rate unchanged at its meeting Wednesday. The non-hike was anticipated by Wall Street, but the central bank has said that further hikes are on the way in 2017.
In March, the Fed voted to raise the federal funds rate by a quarter of a percentage point, to a range of 0.75% to 1%. This marked the third such increase since December 2015, after a nearly 10-year stretch during which the rate did not rise. Policymakers have signaled they intend to raise rates two more times this year, so long as the economy stays on course.
The federal funds rate, the rate banks charge one another for overnight loans, helps determine short-term market rates, as well as the interest rates borrowers pay on car loans, credit cards, personal loans and mortgages.
The next step for consumers depends on which side of the saving-borrowing divide they stand. For guidance, NerdWallet’s in-house experts respond to the most pressing questions from savers, homeowners, home shoppers, credit card holders and investors.
1. What impact do rate hikes have on my retirement savings?
Predicting the effect the federal funds rate increase has on any individual investor’s retirement savings depends a lot on near-term plans for the money and what’s in his or her portfolio: Large U.S.-based companies? Foreign stocks? Dividend-payers? Indexed investments? Individual stocks concentrated in particular sectors?
When a rate increase is expected, the effect on the overall market is usually baked into stock prices already, at least partially. It’s reasonable to expect at least a bit of short-term stock market anxiety in response to the news, since Wall Street is notoriously easy to spook. Intermittent volatility in exchange for higher potential returns on your long-term savings is par for the course. The stock market’s postelection dive and quick turnaround race to all-time highs is just the most recent example.
2. Should I adjust my investing strategy for rate hikes?
In NerdWallet’s end-of-year financial savings survey, 17% of Americans said that stock market volatility was one of their top sources of financial anxiety. Our advice for how to handle potential market turbulence remains the same as it always has been for long-term investors: Take a deep breath, don’t make any sudden moves and concentrate on the things you can control. (Fiddling around with a Roth IRA savings calculator is a more worthwhile distraction than fiddling with the investments in your account.)
It’s good to be aware more rate hikes are coming — the Fed has five more meetings scheduled in 2017 — but here are some other suggestions to keep your hands busy until “business as usual” resumes:
- Revisit your original investment plan: Do higher interest rates change your long-term expectations for any of the investments in your portfolio? In the near term, they might, especially if you’re invested in stocks, exchange-traded funds or mutual funds in industries that are in expansion mode (where the higher costs of borrowing can influence the ability to invest in future growth) or heavily reliant on consumers’ ability to finance purchases (think homes and cars). But what about longer term? If your original investment thesis still stands, then stand by your investments.
- Check up on your asset allocation: A well-balanced portfolio that contains a diversified mix of assets helps investors sleep well through even the most raucous Federal Reserve Board meeting. Find a quiet spot to review your retirement portfolio’s allocation. But don’t be too quick to move things around in response to any short-term blips. (Here’s more on what it means to diversify and guidance on four ways to rebalance your portfolio.)
- Make the most of money you need in the next three to 10 years: Don’t forget to consider your short-term savings as part of your overall portfolio. Any money earmarked for upcoming expenses (such as the first handful of years of retirement or a down payment on a home) should be invested in more predictable and less volatile investments than the stock market.
- Take advantage of market volatility by investing whenever the market takes a hit: Running toward the wreckage with your money takes nerves of steel. But the rewards of following through on the first part of the “buy low, sell high” rule of thumb are well worth it. You don’t have to dive into the discount bin with all of your money at once, either. Adding to your positions over time (also known as dollar-cost averaging) is one of the best investing strategies. See how even small savings increases can affect your future way of life with a retirement calculator.
3. What does a rate hike mean for my savings account?
Rates on savings accounts may continue to inch up, as they have after the most recent rate hikes. That said, further increases probably won’t be significant. Banks consider many factors when setting savings rates, and a Fed rate increase doesn’t play a huge role in those decisions. Still, a bank typically will look at how its competitors respond to a Fed increase, and if other financial institutions keep savings rates low, it won’t have much incentive to increase its own rates. But if banks start raising their rates, others will likely feel compelled to do the same to stay competitive.
It’s probably best to keep your expectations low. When the Fed announced its hike in December 2015, many of the biggest banks reacted in the same way: They raised loan rates and left savings rates unchanged. This boosted banks’ margins.
4. Will rate hikes affect my CDs?
Standard CDs are typically affected in much the same way that savings accounts are: Rates may go up over time but not by a lot. Keep in mind that most standard CDs come with fixed interest rates, so even if your bank’s rates do go up, your CDs’ annual percentage yields won’t change.
Some banks, however, offer bump-up CDs that let customers request a rate increase if the bank’s rates rise. In most cases, customers can exercise this option only once during a CD’s term. These types of CDs usually have lower interest rates than fixed-rate certificates, and many have higher deposit requirements. Still, if you have one, keep track of your bank’s rates. If they go up, ask your financial institution to adjust your CD accordingly.
5. Is the interest rate on my credit cards going up?
Expect your credit card rate to rise each time the Fed raises the federal funds rate. Interest rates on credit cards typically rise or fall with the prime rate, which is directly affected by the Fed’s action. On the occasions when the Fed has boosted rates by 0.25 percentage point in recent years, most major issuers have raised the annual percentage rates on their cards by an equal amount within a month or so. If your rate is going up, you might not even hear about it from your credit card company. Although card issuers usually have to give you 45 days’ notice of an increase in your APR, there’s an exception for increases triggered by a change in the prime rate. So keep an eye on the APRs listed on your credit card statement.
A higher APR on your credit card means it will cost more to carry debt, although how much more depends on your balance. Your APR is a factor in how your minimum payment is calculated, so that could go up as well. Regardless of the effect in dollar terms, reducing your credit card debt is always a wise move.
6. How will a rate hike affect my mortgage?
Thirty-year fixed mortgage rates rose more than half a point (0.50%) in the four weeks following the election of Donald Trump, according to the NerdWallet Mortgage Rate Index. As of late April, 30-year fixed rates are at 4.2%, lower than when the Fed raised rates in March. Considering a $300,000, 30-year fixed-rate mortgage, each half-point increase adds close to $100 a month to your payment.
With the Fed expected to raise rates twice more this year, mortgage rates may have as much as another half point to go. That would put home loan interest rates just under 5% by the end of 2017. Refinance activity has already taken a hit, as rates have climbed to their highest levels since July 2015.
And that’s before Republicans begin implementing their stated agenda to reduce the government’s role in the mortgage market. Those moves could also cause mortgage rates to edge higher, though it may be some time before the Trump administration gets around to its mortgage market reform.
- If you’re already a homeowner with a fixed-rate mortgage, you’re all good. Your rate is set.
- If you have an adjustable-rate mortgage that’s past the teaser rate period, you’ll likely see your payments increase over the next year, depending on how often your rate resets. Keep an eye on mortgage rates and consider moving to a fixed-rate loan. You may want to begin the mortgage shopping process soon if you intend to stay in your home for a few years.
- If you have a home equity line of credit, it’s a good time to consider your options. You may want to convert it to a fixed-rate home equity loan, or budget for paying off your line of credit before rates move much higher.
7. Should I worry if I’m shopping for a home?
Buying a home depends on so many different factors — how much house you can afford, mortgage rates and home prices in your area. Of course, there are also your family’s needs, your job situation, the down payment and the rest.
It’s hard to time all of that perfectly. But here’s the thing: If you’re all set to buy, don’t let moderately higher mortgage rates worry you. Proceed according to your plan. While the long-term outlook seems to indicate steadily rising interest rates, we’re building on very low ground. You know that whole “historically low mortgage rates” thing you’ve heard for the past few years? Yeah, we’re still there.
It will take a long climb higher before mortgage rates are back to their 44-year historical average of 8%. In the meantime, you’ll be in the money with a 4% or 5% home loan. Even a 6% mortgage is a significant discount to the average.
Yes, your buying power can be affected by higher interest rates, but that can also be offset by the better wages and greater employment opportunities of an improving economy.
Dayana Yochim, Tony Armstrong, Hal Bundrick and Anna-Louise Jackson are staff writers at NerdWallet, a personal finance website. Email: email@example.com or firstname.lastname@example.org or email@example.com or firstname.lastname@example.org. Twitter: @DayanaYochim or @tonystrongarm or @halmbundrick or @aljax7.
Updated May 3, 2017.