Wed, Dec 23, 2015 - Page 9 News List

The US Federal Reserve has spoken, so look at your interest-rate policy

We need to brace ourselves for at least four more interest-rate hikes next year and more opportunities for lenders to make all forms of consumer debt more costly

By Suzanne McGee  /  The Guardian

Illustration: Mountain people

The US Federal Reserve has spoken. For the first time in nearly a decade, policymakers have boosted key short-term interest rates. Now that the deal is done, it is time for you to start looking at your interest-rate policy, too.

Banks, having read the signals, were quick to respond. Within hours, Wells Fargo became the first in a steady parade of US financial institutions to boost their own prime lending rates, with those increases taking effect on Thursday last week. The best customers at banks like JPMorgan Chase, KeyCorp, SunTrust, PNC, Citibank, Wells Fargo and many others now pay a base rate of 3.5 percent for their consumer loans, instead of the 3.25 percent that has been in effect for the past seven years.

By historic standards, that is still cheap. For most of the past two decades, prime lending rates have hovered between 5 percent and 10 percent, and as recently as 2007 topped 8 percent, but after such a long period during which lending rates have not budged an inch, any change is bound to come as a shock — especially when it is simply the harbinger of more profound changes still to come.

The rate increase announced by Federal Reserve Chair Janet Yellen and her colleagues last week will not be an isolated event, as they made clear in their statement after wrapping up their meeting and announcing their decision. By the end of next year, they expect the federal funds rate to be at about 1.375 percent, up from its new range of 0.25 percent to 0.5 percent.

That means that we need to brace ourselves for at least four more interest-rate increases next year — and four more opportunities for lenders to make all forms of consumer debt more costly.

This time around, banks and other lenders have had plenty of time to prepare for a single, very small rate increase. Speculation about the first post-financial crisis rate increase has been swirling around the financial markets throughout the year and debt markets had already priced in much of the movement. When Yellen made the much-telegraphed announcement — having previously done everything except hire the Goodyear blimp to warn us all what was coming — the US stock market even staged a brief, day-long rally.

However, going forward the uncertainty will be greater and each rate increase will be that much more burdensome, both for consumers and for the economy as a whole. So, while there is no reason to panic about what modestly higher interest rates might do to your financial situation, or to financial markets, there is a good argument for using the coming weeks to prepare yourself for what is coming.

First of all, you will need to accept the reality that the cost of your debt is going to rise more rapidly than the income you get from your savings. That might seem counterintuitive, since both what you owe in the form of loans and what you receive in interest on debt is tied to the interest rate.

Usually, banks raise interest rates in order to attract cash in the form of deposits, but right now they are pretty flush with capital and do not need to attract much more — they are already wondering how to lend out what they already have in a prudent manner. That means there is little incentive for them, at this early stage in the game, to move rapidly to pay more interest on savings accounts as the Fed raises rates.

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