(The author is a Reuters columnist. The opinions expressed are her own.)
By Liz Weston
LOS ANGELES, Sept 16 (Reuters) - The Fed’s decision to boost interest rates - when it finally happens - will not significantly impact your household budget, at least not immediately. Instead, take it as a signal to get your finances ready for the increases to come.
“It’s like the first snowfall,” said Greg McBride, chief financial analyst for Bankrate.com. “The first snowfall is not what closes roads and cancels school. But it’s a sign the seasons are changing.”
The U.S. Federal Reserve Bank typically changes the influential federal funds rate in a series of moves over time rather than all at once. The Fed’s last sequence of 17 quarter-point rate increases over two years ended in June 2006, while 10 subsequent cuts between September 2007 and December 2008 left the rate near 0 percent.
Future increases may well be more gradual given the challenges the economy faces, McBride said.
“This is going to be different than last time,” McBride said. One increase “doesn’t mean the second will be on its heels.”
Even if the Fed decides to leave rates unchanged this week, market watchers expect a rate hike before the end of the year. Here is what a boost in rates will mean for your finances.
Most banks will be slower to pass higher rates on to savers than to borrowers. Bank profits have been squeezed by low interest rates, so many will hold off on raising yields for savings accounts and certificates of deposit to gain “some breathing room,” McBride said.
Right now, banks are giving savers a mere 0.47 percent on savings and money market accounts, according to Bankrate.com. Look to online banks, which already compete harder for deposits, for better rates.
Competition among these outlets already increased the rates they pay savers by about a quarter percentage point on average over the last two years, even as other rates stayed flat, McBride said.
Credit cards usually have variable rates, which means carrying debt gradually will get more expensive. (The average interest rate for variable cards right now is 15.72 percent, according to Bankrate.com.)
Issuers may eventually cut back on 0 percent balance transfer offers as well or trim how long the teaser rates last, said Bill Hardekopf, chief executive officer of LowCards.com, a credit card comparison site. Now may be a good time to nab one for 18 or 21 months and use it to pay off your balances.
Mortgage rates are not tied directly to the federal funds rate and how they will respond is hard to predict, said Dick Lepre, a senior loan officer with San Francisco’s RPM Mortgage who writes the weekly RateWatch Newsletter. The interest rate for the typical 30-year mortgage is 4.05 percent, while the popular 5/1 adjustable-rate mortgage is averaging 3.24 percent, according to Bankrate.com.
Payments for adjustable-rate loans may tick up, since those reset based on short-term rates, but that doesn’t necessarily mean switching to a fixed-rate loan is a slam dunk.
“Should you refinance? At this point, nobody knows,” Lepre said.
One or even two interest rate boosts are unlikely to have any impact on auto loans, thanks to strong car sales and eager lenders, said Zhenwei Zhou, director of statistical analysis for car comparison site Edmunds.com.
The interest rate for financing a car over a 60-month period is 4.28 percent, according to BankRate.com. And it’s 5.15 percent to finance a used car over 36 months.
“The cost of money is still so extremely low, plus the competition is fierce,” Zhou said.
Federal student loans have offered fixed rates since 2006, but many private student loans have variable rates that will soon tick upward. If you have good credit, consider consolidating private student loans into a fixed-rate loan, said Mark Kantrowitz, senior vice president and publisher of education resource site Edvisors.com.
The average interest rate for a fixed-rate private student loan may be a few points higher than those for variable-rate debt, but borrowers who have responsibly handled their loans since graduation may qualify for lower rates thanks to improvements in their credit scores, Kantrowitz said.
Citizens Bank and Wells Fargo offer private student loan consolidation, as do start-ups such as Earnest, SoFi, CommonBond and others.
The Fed’s increase has been expected for so long that it is already built in to current equity prices, said Judith Ward, a senior financial planner and vice president of T. Rowe Price Investment Services. Recent stock market volatility has more to do with economic problems in China and other factors unrelated to U.S. interest rates, she said.
Ward recommends against trying to predict the timing and pace of Fed moves or making big shifts in your portfolio as a result. “As long as you have an appropriate asset allocation and take a long-term view, you’ll be all right,” Ward said.
Interest-rate increases lower the value of existing bonds, which pay lower rates. Over time, though, bond investors benefit from greater interest payments. Investors concerned about their bond portfolios should consider diversifying into emerging markets and high-yield or junk bonds, which are typically on different cycles than U.S. government and corporate bonds, Ward said.
Editing by Lauren Young and Cynthia Osterman