Wednesday – as expected the Federal Reserve Open Market Committee (FOMC) met and decided to raise the short term rate “Fed Funds Rate” by 0.25%, to 1.75% from 1.5%.
You might ask “Why are they raising the rate?”
And the answer is, the Federal Reserve uses interest rate manipulation to curb (slow) inflation that causes the cost of goods to go up too fast. They use it to stabilize the price of things. If prices go up too fast and wages don’t, then you can afford fewer and fewer goods which means the economy could slow down because we are not buying enough “stuff”.
Why is that important?
Because 60%+ of our economy runs on consumer spending. If we don’t spend, the cash doesn’t flow through the economy, the economy slows down, people lose jobs and then the government has to use other measures to get things rolling again. And round and round we go. It’s a delicate balance between rolling, over-heated or slowing down to a stop.
The Fed Funds Rate is the rate at which banks can borrow from the Fed. The Prime Rate is 3% higher than that (now 1.75%, + 3% = 4.75%) and what we as consumers pay on credit cards, home equity lines of credit, etc. https://www.federalreserve.gov/releases/h15/
So if you have credit card debt and are not on a teaser or special fixed rate, you will see your interest due next month a little higher than last month’s billing statement showed, and your home equity line of credit monthly bill will also show a little higher interest due next month compared to this month’s bill (since interest is due in arrears on mortgage debt).
Now is the time to consolidate your mortgages into one if you still have a home equity line of credit. Maybe even refinance to a 15 year fixed rate to get the house paid off before you retire…