Following the Federal Reserve’s decision to raise interest rates for the first time in years, many are wondering what the effects will be on their upcoming purchase of a new home or car. This TIME article from Christopher S. Rugaber provides some helpful information.
For anyone considering whether to buy a home or car, the Federal Reserve’s interest rate increase Wednesday shouldn’t make much difference.
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.
“Loans that are linked to longer-term interest rates are unlikely to move very much,” Fed Chair Janet Yellen said at a news conference. “Credit card rates … might move up slightly. But remember, we have very low rates, and we’ve made a very small move.”
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, six and a half 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 healthy and solid hiring to continue, perhaps even driving unemployment even further below its current low level of 5%. 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 interest rate impact on the typical household from a quarter percentage point move is almost inconsequential,” said Greg McBride, chief financial analyst at Bankrate.com. “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% or 4.25%” McBride said.
