On Wednesday, the Federal Reserve voted unanimously to raise the interest rate paid on required and excess reserve balances to 2.20 percent.
“Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly,” said the Fed’s Open Market Committee in a statement.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability,” the statement continued. “ The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.”
Following the announcement, Chairman Jerome H. Powell spoke in a press conference. During the conference, Powell noted the strong economic indicators, such as low unemployment levels and stable inflation.
"All of these are very good signs," said Powell. "Of course, that’s not say that everything is perfect. The benefits of this strong economy have not reached all Americans. Many of our country’s economic challenges are beyond the scope of the Fed, but my colleagues and I are doing all we can to keep the economy strong, healthy, and moving forward. That is the best way we can promote an environment in which every American has the opportunity to succeed."
"Today the Committee raised the target range for the federal funds rate by 1/4 percentage point, bringing it to 2 to 2-1/4 percent," Powell continued. "This action reflects the strength we see in the economy, and is one more step in the process that we began almost three years ago of gradually returning interest rates to more normal levels. Looking ahead, today’s projections show gradual interest rate increases continuing roughly as foreseen in June."
With the Federal Reserve set to raise interest rates by 25 basis points, the question now is how will it impact consumers? According to LendingTree Chief Economist Tendayi Kapfidze, homeowners with Adjustable Rate Mortgages and Home Equity Lines of Credit will see the most impact, while fixed rate products will be relatively untouched.
"Mortgage rates, particularly fixed interest rates, are determined by the supply and demand for longer-dated securities. In this regard, another action the Fed is taking does have an impact on mortgage rates, said Kafpidze. The Fed’s plan to normalize its balance sheet by lowering holdings of treasuries and mortgage-backed securities reduces demand for these longer-dated securities and will apply some upward pressure on interest rates over time."
Kapfidze notes that in the last three Fed rate hike cycles, since 1994, while Fed funds rate increased three percent on average, mortgage rates adjusted by only around one percent. In 2015 and 2016, mortgage rates even dropped while Fed Funds went up.
According to Kapfidze, mortgage rates will be more impacted by the Fed’s plan to normalize its balance sheet by lowering holdings of treasuries and mortgage-backed securities. By reducing demand for these longer-dated securities, it will apply some upward pressure on interest rates over time.
In addition to mortgage rates, the rate hike is likely to impact other forms of credit. Holden Lewis, market insights expert at NerdWallet, discussed how else consumers may feel the hike.
“The interest rates that people pay on their credit cards will go up a quarter of a percentage point because the Federal Reserve has raised the federal funds rate by the same amount," said Lewis. "Interest rates on home equity lines of credit will go up a quarter of a percentage point, too. The rate hike could cause minimum payments to rise for borrowers who carry balances on their cards or HELOCs. Most borrowers will see the increase reflected in the next billing cycle."