Federal Interest Rate Change: What It Means for Consumers


The U.S. Federal Reserve won’t raise short-term interest rates—for now, at least. In a September press release, the Federal Open Market Committee cited its desire to “…foster maximum employment and price stability,” as one of the primary reasons to leave rates untouched. The Committee reinforced their decision after an October meeting. Although rising interest rates won’t affect you right away, what happens if the Fed approves a change in 2016? A federal rate hike could affect your personal finances by increasing:

  • Inflation rates. The current inflation rate is 2 percent. According to The New York Times, increasing inflation today “…could send markets into a tizzy (if past experience is any guide), lead to a slower economic recovery and make it harder for workers to press for higher wages.” In short, increasing inflation prematurely could send the economy into a downswing, costing consumers more in living expenses — a factor that could shake a budget balance and decrease liquid savings.
  • Mortgage rates. Although federal rates haven’t officially changed, mortgage provider Freddie Mac announced an increase in 30-year fixed rates on November 5. As a preemptive move, home loan interest increased to 3.87 percent from 3.76 percent. The effects of federal interest rates are directly related to personal loans. If you plan to buy a home next year, expect a shift in mortgage rates as the Fed analyzes the economy.
  • Credit card interest rates. Just as mortgages are affected by federal interest rates, credit card interest is influenced as well. According to Bankrate, the average APR is currently 15.76 percent, and that number has the potential to increase as the Fed weighs the benefits of raising rates.
  • Investment volatility. A Fed rate increase signifies economic growth and confidence—in theory. The reality is, employers who cannot rise to the challenge of meeting inflation increases for their employees may be forced to cut staff, a consequence felt by the market as the demand for stocks decreases. As a result, consumers may see variability in stock prices, affecting retirement portfolios and other investment vehicles.
  • Job loss. As the market fears, some employers may struggle to keep their workforce due to rising costs and dwindling profits. The result is a smaller and more competitive job market.

Based on current data, the Fed’s decision has given the U.S. economy more time to recover without the stresses of higher rates. Although an impending increase may seem like bad news for consumers, many of the changes are temporary, and there are plenty of ways to protect yourself against long-term costs. Begin by:

  • Auditing your budget. A working budget is essential in any economy. If you fear the consequences of inflation, work to cut 10 percent in monthly expenses. The result will help you make ends meet without dipping into emergency savings.
  • Despite the recent increase, fixed mortgage rates are still relatively low. If you purchased a home before the housing crisis, now might be a good time to refinance. Talk to your financial planner about the benefits and risks of locking in a fixed rate before it rises again.
  • Meeting with a financial planner. While meeting with your financial guru, discuss the status of your long-term investments and the possible effects of a Fed rate increase. Review your risk tolerance to determine whether you are comfortable with your portfolio.
  • Reducing debt. Credit card debt is bad news regardless of the economic climate. Cut stress and interest by paying off your revolving balances at the end of each month.

Sharpening your skills. Whether it’s career skills or credit skills, personal savvy is essential in today’s world. Carve a niche at work that makes your role indispensable, securing your career and income. When it comes to credit, learn more about the Five Factors that determine scoring and talk to a professional about how to improve your standing. Positive credit will allow you to secure the best rates the economy has to offer.