The Federal Reserve is likely to raise the federal funds rate at the conclusion of its two-day meeting on Wednesday.
Raising the banks’ overnight borrowing rate—held near zero since the depths of the financial crisis in 2008—has the potential to push up the cost of mortgages, slow jobs creation and curb stock prices but not always.
Here are five things to expect.
1. Mortgage Rates Are Not Likely to Rise Much
The effects of Fed tightening importantly depends on whether a higher federal funds rate pushes up the 10-year Treasury rate, because rates on mortgages, corporate and municipal bonds generally follow that rate up and down.
When Ben Bernanke raised the federal funds rate in 2004-2006, those rates hardly budged, because the Chinese government was purchasing U.S. bonds at a maddening pace to keep the yuan cheap against the dollar.
Now, both the Chinese and European economies are deeply troubled and their monetary authorities are printing lots of money to push down borrowing costs. Private investors seeking safer and better returns will increase their purchases of U.S. securities limiting any increase in U.S. long rates.
2. Bank fees and car loans will get more expensive
Tighter banking regulations designed to prevent a repeat of the 2008 financial crisis have pushed up banks’ costs for providing ordinary retail services. Higher short-term borrowing rates for banks will make things even tougher and banks will likely try to further boost fees on checking accounts and other services, and charge higher rates for short-term credit—credit cards, car loans and home improvements.
The good news is banks may start competing more for your money and pay higher rates on 1 to 5-year CDs.
3. Jobs Creation Won’t Be Much Affected
The stronger dollar and lower oil prices are pinching corporate profits and hiring has slowed this year to about 210,000 new jobs a month—less than the 260,000 monthly average in 2014.
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