FAIRFIELD COUNTY, Conn. — With the quarter of a percent increase in the federal funds rate, Fairfield County residents may soon pay slightly more interest on their loans and credit cards balances, according to one local expert.
The federal funds rate reflects the interest that financial institutions charge each other for overnight loans. Banks use it to set their rates on everything from savings accounts to adjustable-rate mortgages.
Although Fairfield University finance professor Michael Tucker cautioned that the federal funds rate increase is fairly modest, he said it might not be a bad idea to borrow money now, if you need to, before more significant increases occur.
But, of course, “you’re going to be late on some of these things,” Tucker said. The best time to borrow would have been before the Fed’s rate hike announcement Wednesday.
Tucker also advised those who have a balance on credit cards with interest rates in the teens to take advantage now of offers with zero-percent interest rates. If the Fed decides to increase rates further, those offers might disappear, he said.
Those who hold home equity loans may see an increase. If a bank uses the prime rate as a benchmark, it will see an increase of .25 percent, he said.
Investors who own bonds may also see a decline in their values. When interest rates increase, bond prices decrease. But, then again, “What happens to the long-term rate remains to be seen,” he cautioned.
While consumers may be hit with some of the downsides of the rate increase, they might not see the benefits yet. Tucker said banks have plenty of deposits, so they aren’t likely to raise their rates to woo customers.
“Banks are not going to suddenly increase the interest they pay on savings, which is close to zero right now, because they don’t have to attract anybody,” he said.
The annual percentage yield on a savings account in the U.S. is a measly 0.1 percent, according to bankrate.com.
The federal funds rate may inch higher, which could possibly increase interest rates for both saving and borrowing. Policy makers forecast the rate could reach up to 1.375 percent by the end of 2016, according to several reports.
If the Fed raises the rate to that level, consumers would see greater effects then they will from this small recent increase.
“25 basis points is not a huge amount of money,” Tucker said. “One percent? That would have more of an impact.”
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