WHAT DOES THE EXPECTED RISE IN THE FEDERAL INTEREST RATE MEAN TO YOU AS A CONSUMER?
For the last few months, there has been much speculation about whether the Federal Reserve Bank will raise the federal funds rate. As described by Wikipedia, the federal funds rate is "the interest rate" at which depository institutions (banks and credit unions) actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. Institutions with surplus balances in their accounts lend those balances to institutions in need of larger balances. The federal funds rate is an important benchmark in financial markets. But what does it mean for you as a consumer?
The short answer is that it will raise the cost of future borrowing. If you have a fixed rate now on a loan, it will not impact that rate. If you have a variable rate, however, the interest rate you pay when, and if the federal funds rate increases will most likely go up. Likewise, the interest rates for new loans should also go up. In short, it will cost more to borrow in the future. Most experts believe that the Federal Reserve Bank will raise the federal funds rate next month. That does not give you a lot of time.
The good news is that the Federal Reserve Bank is only expected to raise the federal interest rate ¼ of a point. That is not a lot. Moreover, the Federal Reserve Bank has implied that it intends to be extremely cautious about raising the rate further in the future. This promise of a conservative approach to raising the federal interest rate going forward is one of the reasons that the United States stock markets had their best week this year last week. But, again, what does this mean for you as a consumer. Well, if things go as expected, your cost of borrowing will go up, but not much and probably not impact you as much as some originally worried it might.