5 Ways The Federal Funds Rate Increase Will Affect You

The imminent Federal Funds Rate increase will effect us all in one way or another. For savers, it will get better. They’ve been earning very little interest the past several years on their savings accounts. For borrowers, it will be harder. Taking out a loan will be more risky because you’ll owe more from higher interest rates. For investors, it could go either way. A rate increase will be a big signal that the economy is improving and growth will occur, but a rate increase doesn’t tend to put a smile on their investors faces. An interest rate increase will affect those with a home mortgage, car loan, savings account or with money in the stock market.

1. Mortgage Rates Will Rise. Home Sales May NOT Slow Down.

Borrowers are rushing to get current rates locked in now before they go up. Applications are way up right now and will continue until the day the rates go up. But even if rates do go up they wont go up much most likely so for those that are seeking to purchase a modest home, which is most people, they probably wont turn away from the opportunity. Larger real estate transactions may of course decline because of the total cost of the interest.

2. The Tides Will DEFINITELY Turn For Savers

Savers have gained next to nothing the past several years with historic lows in return rates. That all will change by the end of the year most likely with the Federal Funds Rate Increase because they will start gain more interest on the money they deposit at their bank which currently sits at .44%.

3. More Jobs and MAYBE Higher Wages

Unemployment is down to its lowest level since 2008, and the U.S. has added millions of jobs in the last year. A Federal Funds Rate increase is a huge signal that the overall economy is improving big time, especially since it hasn’t moved in almost a decade. When that happens, employers feel comfortable about hiring more people, taking on more debt to expand operations. Wage growth remains the only concern though because it usually swings last and has experienced smaller growth than was hoped recently. The Fed wants to see about 3.5% wage growth, but it was only 2% in February.

4. The Stock Market will PROBABLY Become More Volatile

The stock market has had its largest long-term gain since the boom of the 1990’s. So its due for a market correction to no surprise because stocks are pretty expensive these days. The catalyst for this probably will be the Fed rate increase because it will make stocks less attractive to investors. U.S. bond rates will also increase which is the trademark safe investment of investors.

5. Inflation Will CERTAINLY Slow, or Decrease

Why is the Federal Funds Rate so number so important? It’s the Federal Reserve’s tool to control inflation. What is inflation? It’s the rate at which the general level of prices for goods and services increases, or how much purchasing power of the general public is decreasing. What causes Inflation? An imbalance between supply and demand. With inflation, excessive money is chasing too few goods which results in price increases. The Federal Reserve attempts to decrease the supply of money by making it more expensive to obtain via increase the Federal Funds Rate. In simple terms, your monthly expenses wont be going up. They’ll remain steady or decrease.

The Federal Funds Rate Explained by BankRate.com

The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer’s money on reserve, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to maintain the proper level.

Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down.

Recommendation From Santa Fe Ranch and Farms

An increase in the Federal Funds Rate will make it more expensive to take out a loan and therefore also harder to sell your home. So if you are strongly considering a move, now would be the time to do it. Same goes for getting a loan with a great rate, because those will disappear overnight once the Fed pull the trigger on the rate increase.

Contact Santa Fe Ranch and Farms



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