For Hub City Times
If you have been keeping up with news stories about the economy lately, you may have heard that the Federal Reserve has been raising interest rates and is likely to do so more often in the future. What does this mean, and how will it impact the average consumer?
Who is “the Fed?”
The Fed is the central bank of the United States, which means it is owned by private banks and operates independently of the U.S. government. It is led by a board of governors, who are appointed by the president.
The Fed has three mandates: maximize employment, stabilize prices, and moderate long-term interest rates. It accomplishes those mandates by raising or lowering the Federal Funds Interest Rate, which is managed by the Federal Open Market Committee (FOMC) and is the basis for every other interest rate out there. The FOMC meets eight times per year and issues a statement about the general U.S. economy and if the Fed will raise its rate.
The most recent increase was just the third hike since 2006. The first was in December 2015 and the second in December 2016.
Does the rate impact me?
Yes. Even though consumers do not directly borrow money from the Fed, the banks that provide their car loans and mortgages do. Since the Fed Funds rate is the basis for other rates — by being the cost of what your bank must pay to get money — raising and lowering it affects the rates you, the consumer, can get from your bank.
Are high rates bad?
No. While low interest rates on large purchases like homes are good for consumers, extended low interest rates — like there have been over the past 10 years — mean that the economy is not growing very fast, and consumers are not earning much on their savings. When the Fed Funds rate goes up, depositors see increased interest rates on their savings accounts and CDs, so higher rates are a bonus for savers.
It is also important to note the Fed raises rates a little at a time, usually only 0.25 percent, and the higher rates only affect new loans and loans with adjustable rate terms. Higher rates also mean the FOMC sees signs that the economy is getting stronger.
“As a depositor-owned institution, our dividend is in the form of above market interest rates and lower fees on our deposits,” commented Rob Mort, CFO of Forward Financial Bank. “It’s important to remember that interest rates increase due to an improving economy, which benefits everyone.”
If you have any questions about how the Fed raising interest rates will affect your finances, be sure to speak to your bank. They will be able to offer specific advice according to your accounts and circumstances.