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When it comes to interest rates and credit, we’ve been spoiled for almost a decade. Thanks to a cheap Federal Funds Target Rate, everything from mortgages to business, auto, and student loans have been on sale.
Paying 18% for a mortgage sounds more like cruel and unusual punishment than the actual history of the 1980s.
Even today, after 6 separate interest rate increases since 2015, mortgage rates are only 4.5%.
But key economists, investors, and even President Trump see interest rates rising in the next few years. And the latest reports show that the Federal Reserve has plans for three more rate increases this year, plus multiple increases through 2020.
In order to see how interest rates affect you, it’s important to understand why interest rates are rising.
The Federal Reserve increases interest rates to keep inflation from getting out of control.
When they see economic growth and unemployment rates on the rise, combined with an inflation rate around 2% per year… they generally start increasing interest rates.
From the perspective of a healthy economy and job growth, this is a good thing.
However, the interest rate set by the Federal Reserve also affects consumer debt.
So as the Fed continues to raise interest rates this year — as well as in 2019 and 2020 — you can expect that the cost of borrowing money will go up.
And maybe more than most expect.
According to Ian Shepherdson, chief economist at Pantheon Macro, “Markets are underestimating the risk of interest rate rises” and believes we could see 4 rate increases this year alone.
The Federal Reserve policymakers have suggested just two more rate increases this year, but are ready to act more quickly if inflation jumps up higher than expected.
The most simple way to think of it is this:
Any loans with fixed rates, such as Federal student loans or fixed rate mortgages, will remain unchanged.
Variable rate debt will be affected in various ways.
Many people with credit card debt will see a small, but instant increase in their interest rate, because it’s directly tied to the Federal Reserve’s prime rate.
Most private student loans are offered at a variable rate, and interest rates will continue to increase gradually.
Auto loans with fixed rates will remain unchanged — but may rise if you have a variable loan.
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The Builders at Wealth Factory
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