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The Federal Reserve has raised interest rates twice in 2018, not only increasing the amount that consumers have to pay on credit cards and loans, but also making them less likely to be able to afford large purchases. The Fed’s current target range for the federal funds rate is 2.25 percent to 2.5 percent.
“The effect of raising interest rates is to make borrowing more expensive,” said Mark Zandi, chief economist at Moody’s analytics. “And that makes it more difficult for people to buy houses, cars and boats.”
The Federal Reserve raised interest rates by a quarter-point, a move that has been widely expected. The Fed’s decision to raise rates means that borrowing money will cost more. The central bank also said it would raise its benchmark short-term rate to 1.25% from 1%. The Fed’s rate increase is the second in three months, following a similar move in December, when it hiked its benchmark rate for the first time since 2006.
The Fed is watching closely for signs of inflation as it tries to bring down unemployment — currently at 4.1% — without spurring faster price increases or financial instability. The Fed has raised rates twice this year and signalled its intention to do so again before year’s end if necessary.
The Fed’s Open Market Committee said on Wednesday it will raise short-term interest rates by 25 basis points to a range of 1.75% to 2%. This is a huge boost in interest rates, and one that should have a big impact on the stock market. The Dow Jones Industrial Average DJIA, -0.27% rose about 200 points after the Fed announced its decision. It was up nearly 400 points at one point after the news, and then continued its rise into record territory later in the day.
Economists Says:
A key question for economists is whether people will continue to spend more as a result of higher prices for goods and services. Another concern: If consumers are unable to pay off their debts, they could face credit card companies with an array of collection tactics — from charging off accounts early to using aggressive measures such as garnishing wages or seizing tax refunds. Inflation is low, so the Fed is raising rates to keep prices from rising too fast. But that has the effect of making it more expensive to borrow money. And higher interest rates mean higher payments on credit cards and other loans.
The Fed's decision on whether and how much to raise rates will depend on its economic forecasts, which are based on a wide range of data from surveys, trade balances and inflation. The Fed has raised its benchmark rate three times since last December, after holding it near zero for seven years. It expects to raise rates again in June and September; if it does so as planned, mortgage rates would jump by 0.25 percentage points each time.
First, it’s harder to get approved for a credit card than it used to be. The average interest rate on a personal loan has risen from 6 percent in January 2000 to 14 percent today.
Final Words
But you may have even more trouble getting approved for an auto loan or a mortgage — because banks also charge higher rates on those loans these days. That's because banks have been reducing their lending standards in recent years as they compete with each other for deposits and make sure they can afford the risk of lending money. Getting loans now from banks or anywhere is just handling a lot of pressure with you! No doubt increased interest rates and debts are surely going to ditch a middle man life. Let’s hope for some deflation.
