Interest Rates Rising

Last week the Federal Reserve raised its base interest rate for the first time since 2006.  The Fed rate is the rate at which banks lend money to each other.  During the financial crisis of 2007-2009, this rate quickly spiraled down to zero, where it has remained ever since.  Until last week.  With the economy strengthening the Fed finally felt secure in starting to move this rate upward by 0.25%.  Tiny moves like this are expected to continue throughout 2016 until we land at a Fed rate of 1%.  Which is still very, very low.

So what does this change in interest rates mean in real life? Savings interest has been ridiculously low since the financial crisis.  And this is not likely to change anytime soon.  It will probably be late 2016 or even 2017 before we start to see any movement there, as banks are slow to pass on interest gains to savers.  Consumers of credit, however, will see changes right away.  Mortgage rates, car loan rates, and credit card interest rates will all rise almost immediately.  If you have any variable rate debt that can be converted to fixed rate debt, it’s best to do that sooner rather than later.  Most existing student loans will not see any change, as federal student loans made in the last ten years all have fixed interest rates.  But interest rates on student loans borrowed after July 1, 2016 will likely have higher rates than loans made in the year prior.

This interest rate increase is a sign of hope to me.  Hope that we are finally returning to a more normal economy.  The reality is that a 1% Fed rate is still extraordinarily low, and while credit interest rates will be rising, it won’t be by enough to break anyone.  Normalcy in the economy has been completely absent for most of the last decade, so now we move forward and learn what our new normal in America is going to be.

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