Buying a car? A home? Fed rate hike shouldn’t matter much

WASHINGTON (AP) — The Federal Reserve is raising interest rates from record lows set at the depths of the 2008 financial crisis, a shift that heralds modestly higher rates on some loans.

The Fed coupled its first rate hike in nine years with a signal that further increases will likely be made slowly as the economy strengthens further and inflation rises from undesirably low levels.

The central bank said in a statement after its latest meeting that it was lifting its key rate by a quarter-point to a range of 0.25 percent to 0.5 percent. Its move ends an extraordinary seven-year period of near-zero borrowing rates. But the Fed’s statement suggested that rates would remain historically low well into the future, saying it expects “only gradual increases.”

“The Fed reaffirmed that the pace of rate hikes would be slow,” James Marple, senior economist at TD Economics wrote in a research note. “The Fed’s expectations for rate hikes next year are set alongside a relatively cautious and entirely achievable economic outlook.”

Wednesday’s action reflects the central bank’s belief that the economy has finally regained enough strength 6½ years after the Great Recession ended to withstand higher borrowing rates.

Investors’ immediate reaction to the Fed’s announcement, which was widely anticipated, was muted. Stocks moved slightly up. Higher interest rates in the U.S. tend to cause the dollar to strengthen against other currencies.

The bond market didn’t’ react much. The yield on the 10-year Treasury note held steady at 2.27 percent.

Rates on mortgages and car loans aren’t expected to rise much soon. The Fed’s benchmark rate doesn’t directly affect them. Long-term mortgages, for example, tend to track 10-year U.S. Treasury yields, which will likely stay low as long as inflation does and investors keep buying Treasurys.

But rates on some other loans, like credit cards and home equity credit lines, will likely rise, though probably only slightly as long as the Fed’s rate hikes remain modest.

Shortly after the Fed’s announcement, major banks began announcing that they were raising their prime lending rate from 3.25 percent to 3.50 percent. The prime rate is a benchmark for some types of consumer loans such as home equity loans. Wells Fargo was the first bank to announce the rate hike.

For months, Chair Janet Yellen and other Fed officials have said they expected any rate hikes to be small and gradual. But nervous investors have been looking for further assurances.

An updated economic forecast released with the policy statement showed that 14 of the 17 Fed officials foresee four or fewer rate hikes in 2016. That is in line with the consensus view of economists that the Fed’s target for the federal funds rate — the that banks charge on overnight loans — will end next year around 1 percent.

The Fed’s action was approved by a unanimous vote of 10-0, giving Yellen a victory in achieving consensus.

The Fed statement struck a generally more upbeat tone in its assessment of the economy. It cited “considerable improvement” in the job market. And it expressed more confidence that inflation, which has been running well below the Fed’s 2 percent target, would begin rising. It suggested that this would happen as the effects of declines in energy and import prices fade and the job market strengthens further.

The central bank’s target for the federal funds rate — the interest that banks charge each other — has been at a record low between zero and 0.25 percent since December 2008. At the time, Fed officials led by Ben Bernanke were struggling to contain a devastating financial crisis that triggered the worst recession since the Great Depression.

The recession officially ended in June 2009. But unemployment kept rising, peaking at 10 percent before starting to fall. The jobless rate is now at a seven-year low of 5 percent, close to the Fed’s target for full employment.

Fed hike’s impact on consumers expected to be modest

For anyone considering whether to buy a home or car, the Federal Reserve’s interest rate increase Wednesday shouldn’t raise alarms.

The rates that most people pay for mortgages, auto loans or college tuition aren’t expected to jump anytime soon. The Fed’s benchmark interest rate has limited influence on those things.

Still, the Fed’s move to lift its key rate by a quarter-percentage point will raise short-term borrowing costs for banks. And that, in turn, is intended to prod banks to boost certain other rates. Rates on credit cards and home equity loans and credit lines, for example, will most likely rise, though probably only slightly.

The rate the Fed controls is only one factor among many that can influence longer-term borrowing costs. And the Fed made clear it will assess the economy’s health before raising rates further.

Mortgage rates tend to move in sync with the yield on 10-year Treasury notes. When inflation remains as low as it is now, Treasury notes, with their modest returns, are considered a safe and decent investment. And heavy purchases of Treasurys by U.S. and foreign investors — and by many foreign governments, such as China — help keep those yields low.

“The demand for Treasurys has mushroomed,” said Carl Tannenbaum, chief economist at Northern Trust. “What that means is that for any given monetary policy, interest rates are still going to be lower than they would have been 10 or 15 years ago.”

The Fed’s decision to raise rates is in many ways a healthy sign: It’s a vote of confidence that the economy, 6½ years after the Great Recession officially ended, can finally withstand higher borrowing costs and keep growing at an acceptable pace.

Even with a rate increase, most economists expect consumer spending to stay heathy and solid hiring to continue, perhaps even driving unemployment even further below its current low level of 5 percent. Should the economy stumble, the Fed could postpone further rate increases.

Other trends are also working in consumers’ favor: Gas prices are still falling, and there are signs that paychecks are finally starting to rise after years of sluggish growth.

“These things are good for the consumer and will easily outweigh the impact of a rate increase,” said Chris Christopher, an economist at forecasting firm IHS Global Insight.

The most visible effects of the Fed increases will probably be in short-term borrowing. Rates for credit cards and home equity lines of credit should rise, typically by the same amount as the Fed’s increase. The increases could appear as soon as one or two months after the Fed’s action. Those rates are tied to banks’ prime rate, which responds quickly to the Fed’s changes.

Also, Americans with adjustable-rate mortgages will probably face a higher rate at the date of their next adjustment. Auto-loan costs may rise a well, economists said, though not as fast as the short-term rate the Fed controls. Auto-loan rates typically follow the yield on two-year Treasurys.

Greg McBride, chief financial analyst at Bankrate.com, calculates that for a $25,000, five-year car loan, a one-quarter percentage point increase would boost monthly payments by precisely $3.

“The interest rate impact on the typical household from a quarter percentage point move is almost inconsequential,” he said. “Most people won’t even notice.”

And most people buy homes for reasons that have little to do with a slight rise or fall in mortgage rates, McBride said. They tend to buy when they feel financially secure or experience a major life change, such as having children.

“All those reasons people buy houses remain the same, whether mortgage rates are 4 percent or 4.25 percent,” McBride said.

Last month, Doug Lewandowski moved up the closing date on a two-bedroom Chicago condo he is buying to ensure that he could lock in his rate. He has seen mortgage rates rise by a quarter-point since he started looking in August. Still, the timing of the Fed’s move wasn’t a big factor in his decision.

“I didn’t want rates to jump up significantly, but I wasn’t willing to settle on a place just to get a lower interest rate,” he said.

Lewandowski’s outlook, if typical of prospective homeowners, is one reason many economists think home sales may rise next year even if mortgage rates tick up.

Many analysts expect the Fed to gradually raise its short-term rate by a total of 1 percentage point by the end of 2016. If so, Frank Nothaft, chief economist at CoreLogic, forecasts that the average 30-year fixed mortgage would rise from roughly 4 percent to about 4.5 percent.

To put that in perspective, before the Great Recession the 30-year fixed mortgage rate never fell below even 5 percent.

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