Modern Australian

Fed Facts - 5 Ways the Federal Reserve's Interest Rate Decisions Can Affect You

Short-term interest rates in America are determined by the Federal Reserve's Open Market Committee. The FOMC’s moves are monitored by analysts, stock traders, economists, and every property investment advisor as rate rises and cuts have a direct and immediate impact on the economy in general and their niches specifically.

In general, lower rates make borrowing more affordable, while higher rates generally increase the total cost of anything purchased on credit. To understand more about how the Fed’s interest rate decisions can affect you, consider the following five points:

1. Your mortgage may not be affected

When the Fed announces a rate cut, many people expect their payments to decrease. However, in reality, it depends on what type of mortgage you have and the rate to which your mortgage is linked. If you have a fixed-rate mortgage, your loan is fixed to the long-term interest rates, meaning any short-term changes made by the Fed will not affect your payments. 

Even those with an adjustable-rate mortgage (ARM) may not see a change in their payments if the Fed adjusts the short-term interest rate. This is because ARMs are often linked to the Treasury yield, which will only really move with the Fed if it’s being pushed by the same market forces that inspired the Fed’s rate change.

2. HELOCs are a different story

If you have a home equity line of credit (HELOC), then you’re likely to feel the impact of any rate changes made by the Fed because HELOC interest rates are generally linked to the prime rate. So, when the Federal Reserve announces interest rate drops, this is most likely going to be good news. Interest rate hikes may mean you need to tighten your budget. 

3. Your credit card could be affected

To know whether your credit card will be affected by Fed decisions, you need to check whether you have a variable interest rate and whether it’s pegged to the prime rate. Most credit cards tick both of these boxes, meaning the Fed’s interest rate decisions will likely affect the amount of interest you pay on your purchases.

Of course, the rate you pay will not be as low as the Fed’s rates. Credit card companies base their rates on the prime rate, which is impacted by the Fed. However, they also add their own internally determined margin. 

4. Your savings may suffer

While those who live on credit rejoice when they hear of interest rate drops, the opposite is true for diligent savers. When the Fed lowers interest rates, banks tend to follow suit, dropping the rates they pay on high-yield savings accounts and CDs.

This may be frustrating, but it’s an important step in maintaining market balance. Encouraging consumer spending can prevent the economy from dipping into a recession, and this is the rationale behind lowering interest rates in the first place. 

5. Car loans offer a better deal when rates are low

Auto loans are also linked to the prime rate, meaning when the Fed is keeping interest rates low, it’s generally a better time to consider financing a car. Any rate rises will likely also impact the interest added to your repayments, so it’s worth keeping an eye on predictions about the Fed’s decisions and managing your repayment schedule accordingly.

Now that you’re aware of the above facts, you may be more interested when you see announcements from the Fed in the news. After all, these decisions can affect your home, your finances, and your daily life.

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