Since 2008, the Federal Reserve has kept the federal funds rate—the banks’ overnight borrowing rate—near zero. Now more confident about prospects for growth and inflation, policymakers are preparing to raise those short-term rates—perhaps at the conclusion of their two day meeting on Thursday or later this year.
Higher borrowing costs for banks can cause mortgage rates to jump, jobs to become scarcer and stock to tumble—but not always.
Here are five things you need to know.
1. Mortgage Rates Are Not Likely to Rise Much
The impact of Fed tightening importantly depends on whether increasing the federal funds rate pushes up the 10-year Treasury rate, because rates on mortgage, corporate and municipal bonds follow that rate up and down.
When Ben Bernanke pushed up short rates in 2004-2005, those long rates hardly budged, because the Chinese government was purchasing Treasuries at a maddening pace to keep the yuan cheap against the dollar.
Nowadays, Beijing is selling Treasuries but private investors in Asia, doubting prospects for the world’s second largest economy, are rushing into U.S. securities and other assets.
Since the Chinese stock market began its collapse in June, the 10-year Treasury rate has fallen from 2.50 to 2.2 percent—despite statements from many Fed officials about raising rates soon.
2. Bank fees and car loans will get more expensive
New banking regulations designed to prevent a repeat of the 2008 financial meltdown have pushed up banks’ costs for providing ordinary retail services. Higher short-term borrowing rates for banks will make things worse and look for banks 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. Unemployment Won’t Be Much Affected
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