On March 22, 2005, the Federal Reserve’s rate-setting committee raised the short term interest rates for the seventh time since last July. This time the Fed raised the rates by one quarter bringing it to 2.75. Fears of the economy escalating too high were main reasons for the increase. The Fed is obviously trying to fight or stay above inflation. For the past ten months the Fed has been referring to the current status as a “pace that is likely to be measured”, meaning is plans on continuing to raise rates gradually by quarter point increments.
The Fed and most economists believe that the rates are still too low. However some fears arise from the situation. For instance when the Fed is trying to outrun inflation it increases interest rates. This can be very discouraging for job growth and num up the economy. Historically, when interest rates are dropped a stimulant economy as well as invited inflation arises. At the current state of rates the fed seems to be at a happy medium, but no one knows how long we can outrun inflation and not cause problems for the economy.
Results will be seen soon for consumers who have home equity lines of credit and variable-rate credit cards. How the increase will affect mortgages, auto loans, as well as other long term interest rates is not totally predictable at this point. The Fed really has no control over long term rates. It indirectly controls the federal funds rate by withdrawing and adding cash to the banking system from the selling and buying of securities.
Most people do knot know if this current rate increase will effect them in a negative, positive, or impartial manner. Broken down here is an overview of who gains and who loses from the recent March 22nd interest rate increases.
Home shoppers and Owners neither gain nor lose. Monthly house payments will not be effected if you already have a fixed rate mortgage. For people shopping for fixed rate mortgages there should not be any effect at the current state of things. Although the Fed has had a little success in their efforts to cause long term interest rates to rise, Long term interest rates respond primarily to inflation expectations and the Feds increases usually head off inflations. Looking at it that way, the Feds increases would serve to put a lid on fixed mortgages.
Borrowers from a home equity line of credit come off as losers in the current situation. Home equity lines of credit, HELOC, have variable rates that move up and down with prime rates. Since the prime rate will immediately rise, current holders will most likely see rates adjust upwards in the next few payments, all depending on how often rates are adjusted by the lender. It seems to be too soon to tell how the rates will affect those who borrow from a home equity loan. It is just too soon to guess what will happen to rates for those who are out shopping for loans judging from past trends.
New and used car loan rates both continue to stagnate, making auto shopper’s potential losers. Since rates charged on vehicle loans are closely tied to the prime rate which is also sensitive to rates changes by the Fed.
Credit card debtors seem to be definite losers with the current rate increases. Although there are many fixed rate cards out there to protect consumers, there is no guarantee that rates on new cards will not change as the Fed projects to keep moving up rates. Variable rate credit cards continue to rise in current months where fixed rate cards have stayed at the same amount for the last few months. In any case it is best to pay off credit card debt as quickly as possible.
Adjustable rate mortgage shoppers and holders are also losers with current increases. Rates will certainly increase for those holding adjustable rate mortgages, ARM, when their monthly, six month, or yearly adjust periods arrive. By historical standards rates are low, Making it likely, but not certain, that they will be higher in a few years.
In any case it is apparent that the Federal Reserve does not plan on halting rate increases any time soon. With that being said it is important to review all financial ventures before entering them to see if they are right for you and your budget. For those who are already financially obligated it is always crucial to keep watch on the market and trends that the Federal Reserves seems to be setting through their adjustments to current interest rates.