WASHINGTON — Are mortgage rates going up? How about car loans? Credit cards?
How about those nearly invisible rates on bank CDs — any chance of getting a few dollars more?
With the Federal Reserve having raised its benchmark interest rate Wednesday and signaled the likelihood of additional rate hikes later this year, consumers and businesses will feel it — if not immediately, then over time.
The Fed’s thinking is that the economy is a lot stronger now than it was in the first few years after the Great Recession ended in 2009, when ultra-low rates were needed to sustain growth. With the job market in particular looking robust, the economy is seen as sturdy enough to handle modestly higher loan rates in the coming months and perhaps years.
“We are in a rising interest rate environment,” noted Nariman Behravesh, chief economist at IHS Markit.
Here are some question and answers on what this could mean for consumers, businesses, investors and the economy:
Q. I’m thinking about buying a house. Are mortgage rates going to march steadily higher?
A. Hard to say. Mortgage rates don’t usually rise in tandem with the Fed’s increases. Sometimes they even move in the opposite direction. Long-term mortgages tend to track the rate on the 10-year Treasury, which, in turn, is influenced by a variety of factors. These include investors’ expectations for future inflation and global demand for U.S. Treasurys.
When inflation is expected to stay low, investors are drawn to Treasurys even if the interest they pay is low, because high returns aren’t needed to offset high inflation. When global markets are in turmoil, nervous investors from around the world often pour money into Treasurys because they’re regarded as ultra-safe. All that buying pressure keeps a lid on Treasury rates.
Last year, for example, when investors worried about weakness in China and about the U.K.’s exit from the European Union, they piled into Treasurys, lowering their yields and reducing mortgage rates.
Since the presidential election, though, the 10-year yield has risen in anticipation that tax cuts, deregulation and increased spending on infrastructure will accelerate the economy and fan inflation. The average rate on a 30-year fixed-rate mortgage has surged to 4.2 percent from last year’s 3.65 percent average.
After the Fed’s announcement Wednesday of its rate hike, the yield on the 10-year Treasury actually tumbled — from 2.60 percent to 2.49 percent. That decline suggested that investors were pleased that the Fed said it planned to act only gradually and not to accelerate its previous forecast of three rate hikes for 2017.
Q. So does that mean home-loan rates won’t rise much anytime soon?
A. Not necessarily. Inflation is nearing the Fed’s 2 percent target. The global economy is improving, which means that fewer international investors are buying Treasurys as a safe haven. And with two more Fed rate hikes expected later this year, the rate on the 10-year note could rise over time — and so, by extension, would mortgage rates.
It’s just hard to say when.
Behravesh forecasts that the average 30-year mortgage rate will reach 4.5 percent to 4.75 percent by year’s end, up sharply from last year. But for perspective, keep in mind: Before the 2008 financial crisis, mortgage rates never fell below 5 percent.
“Rates are still incredibly low,” Behravesh said.
Even if the Fed raises its benchmark short-term rate twice more this year, as it forecast on Wednesday that it would, its key rate would remain below 1.5 percent.
“That’s still in the basement,” Behravesh said.
Q. What about other kinds of loans?
A. For users of credit cards, home equity lines of credit and other variable-interest debt, rates will rise by roughly the same amount as the Fed hike within 60 days, said Greg McBride, Bankrate.com’s chief financial analyst. That’s because those rates are based in part on banks’ prime rate, which moves in tandem with the Fed.
“It’s a great time to be shopping around if you have good credit and (can) lock in zero-percent introductory and balance-transfer offers,” McBride said.
Those who don’t qualify for such low-rate credit card offers may be stuck paying higher interest on their balances because the rates on their cards will rise as the prime rate does.
The Fed’s rate hikes won’t necessarily raise auto loan rates. Car loans tend to be more sensitive to competition, which can slow the rate of increases, McBride noted.
Q. At long last, will I now earn a better-than-measly return on my CDs and money market accounts?
A. Probably, though it will take time.
Savings, certificates of deposit and money market accounts don’t typically track the Fed’s changes. Instead, banks tend to capitalize on a higher-rate environment to try to thicken their profits. They do so by imposing higher rates on borrowers, without necessarily offering any juicer rates to savers.
The exception: Banks with high-yield savings accounts. These accounts are known for aggressively competing for depositors, McBride said. The only catch is that they typically require significant deposits.
“You’ll see rates for both savings and auto loans trending higher, but it’s not going to be a one-for-one correlation with the Fed,” McBride said. “Don’t expect your savings to improve by a quarter point or that all car loans will immediately be a quarter-point higher.”
Ryan Sweet, director of Real Time Economics at Moody’s Analytics, noted:
“Interest rates on savings accounts are still extremely low, but they’re no longer essentially zero, so that may help boost confidence among retirees living on savings accounts.”
Q. What’s in store for stock investors?
A. Wall Street hasn’t been spooked by the prospect of Fed rate hikes. Stock indexes rose sharply Wednesday after the Fed’s announcement.
“The market has really come to view the rate hikes as actually a positive, not a negative,” said Jeff Kravetz, regional investment strategist at U.S. Bank.
That’s because investors now regard the central bank’s rate increases as evidence that the economy is strong enough to handle them.
Ultra-low rates helped underpin the bull market in stocks, which just marked its eighth year. But even if the Fed hikes three times this year, rates would still be low by historical standards.
Kravetz is telling his clients that the market for U.S. stocks remains favorable, though he cautions that the a pullback is possible, given how much the market has risen since President Donald Trump’s November election.
Q. Why is the Fed raising rates? Is it trying to slam the brakes on economic growth?
A. No. The rate hikes are intended to withdraw the stimulus provided by ultra-low borrowing costs, which remained in place for seven years beginning in December 2008, when the Fed cut its short-term rate to near zero. The Fed acted in the midst of the Great Recession to spur borrowing, spending and investing.
The Fed’s first two hikes — in December 2015 and a year later — appear to have had no negative effect on the economy. But that could change as rates march higher.
Still, Fed Chair Janet Yellen has said policymakers intend to prevent the economy from growing so fast as to boost inflation. If successful, the Fed’s hikes could actually sustain growth by preventing inflation from rising out of control and forcing the central bank to have to raise rates too fast. Doing so would risk triggering a recession.
Q. Isn’t Trump trying to speed up growth?
A. Yes. And that goal could pit the White House against the Fed in coming years. Trump has promised to lift growth to as high as 4 percent annually, more than twice the current pace. He also pledges to create 25 million jobs over a decade. Yet the Fed already considers the current unemployment rate — at 4.7 percent — to be at a healthy level. Any significant declines from there could spur inflation, according to the Fed’s thinking, and require faster rate increases.
More rate hikes, in turn, could thwart Trump’s plans — something he is unlikely to accept passively.
Under one scenario, the economy could grow faster without forcing accelerated rate hikes. If the economy became more productive, the Fed wouldn’t have to raise rates more quickly. Greater productivity — more output for each hour worked — would mean that the economy had become more efficient and could expand without igniting price increases.