Federal Reserve Update - September 2018 - Rate Hike May Hurt More Than Help Consumers

Savings account rates and money market rates have barely budged after a series of federal-funds-rate increases by the FOMC since 2015. Learn how to profit as bank rates rise unevenly.
By Richard Barrington
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fed-update-articleThe Federal Reserve has decided to push its federal-funds-rate target above 2 percent for the first time since mid-2008. Consumers should be prepared for differing impacts across a range of financial products.

Federal-funds-rate target: 2.00 to 2.25 percent

In the latest in a series of rate increases, the Federal Open Market Committee (FOMC) announced on September 26 that it would raise its rate target to between 2.00 and 2.25 percent. The Fed has now raised its rate target by a total of 2 percent beginning with the first in a series of increases in December of 2015.

This can largely be attributed to three economic conditions:

  1. The job market remains strong, with unemployment at 3.9 percent.
  2. Inflation has increased steadily over the past three years and is now running at an annual rate in excess of 2 percent.
  3. Interest rates were driven to extraordinarily low levels in response to the Great Recession, and the Fed has expressed its intention to move them toward more normal levels.

Impact of rate increase differs on credit cards, savings account rates, etc.

The federal funds rate directly affects financing transactions between the Federal Reserve and banks. This influences, but does not directly control, the rates you see on products like credit cards, savings accounts, and mortgages, etc.

The impact on various consumer financial products is not the same across the board. Consequently, the string of Federal Reserve rate increases since late 2015 has served to hurt consumers more than it has helped them. Many consumers ask the following questions, and the answers may shed light on how federal-funds-rate increases impact different financial products. Knowing this may help you decide what course to take to protect your financial position in response to rising rates.

  1. Will the interest rate on my debt go up?
    Over time, yes -- but the impact might be felt to different degrees and at different times, depending on the type of debt you have.

    Fixed-rate loans won't be impacted until the next time you borrow. Also, things like mortgages and car loans have been affected far less by recent rate increases than credit cards.

    Credit card rates have not only risen the fastest in recent years, but you feel these increases almost immediately since rate changes apply to each new purchase. Because of rising rates, this is a good time to reduce credit card debt and to shop around for credit card offers that might at least help you slow the pace of rate increases.

  2. Will I start seeing higher savings account rates?
    Perhaps rates will rise -- but prior to the most recent rate increase, the average savings account rate had risen by just 0.02 percent since the Fed began raising rates in late 2015.

    So don't count on automatically getting much of a boost to your savings account interest rate because of a Fed rate increase. However, Money Rates has identified a few banks that are breaking away from the pack and consistently offering higher rates. This is a good time to shop for the highest savings rates, with online savings account rates still out-performing branch-based savings account rates.

  3. Will the interest rate on my money market accounts go up?
    The story for money market accounts has been much the same as it has been for savings account rates: Fed rate increases in recent years have had little impact. But again, your best bet for earning higher interest rates on money market accounts is to shop around for them.

  4. Should I be looking at short- or long-term CD rates?
    This is a tough call. Short-term CDs let you reinvest more frequently, which gives you an advantage as rates rise. However, long-term CDs typically offer higher rates and, in recent years, the gap between long-term and short-term CD rates has been widening.

    A good strategy for this environment is CD laddering, which allows you to earn higher long-term CD rates without completely sacrificing liquidity. Having a series of different CD rates allows money to become available at regular intervals so you can take advantage of the trend toward rising interest rates on CDs. This is also a good time to favor small, early withdrawal penalties so you can have some flexibility if there is a sharp increase in CD rates.

Generally speaking, higher interest rates are good for savers and bad for borrowers. However, when inflation is one of the underlying reasons for rate increases, it negates some of the positive impact on savers. Thus, both savers and borrowers could lose if they don't take appropriate action and actively shop for the best rates for each of the financial products they use.

More resources for credit card holders:

Calculator -- Credit card payoff calculator

Calculator -- Should I switch to a lower-interest credit card?

Want to compare credit cards? Read up on different types of credit cards: Credit card essentials

More resources for bank depositors:

Want a consistently competitive bank? Read America's Best Rates survey of the top ten

Shopping for the best CD rates? Use our CD rate finder tool

Previous Federal Reserve Board Update Articles:

FOMC Date2018 FOMC Meeting Update Articles
1/31/20183 ways to profit when market rates outpace the Fed
3/21/2018Fed rate increases not helping consumers
5/2/2018Interest rates surge despite Fed's inaction
6/13/2018Your strategy when the federal funds rate rises
8/1/2018Banks aren't waiting for Fed rate increases
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