The Good and Bad of the Federal Reserve Rate Hike
The Federal Reserve raised its key interest rate from 1.5% to 1.75% yesterday, which is the highest rate since 2008. This is the first of three gradual interest rate increases expected for 2018.
The decision to raise the rate was, in part, due to a strengthened U.S. economy and strong stock market.
“Fiscal policy has become more stimulative, ongoing job gains are boosting incomes and confidence, foreign growth is on a firm trajectory, and overall financial conditions remain accommodative,” the new Chairman Jerome H. Powell said in his first news conference.
While rates may seem high, they have been at historic lows since the 2007 recession, as the Federal Reserve attempted to revive the economy. The trick now is to steadily raise interest rates back to normal levels without frightening American consumers and stagnating the economy.
The rate hike is good news for people with savings and investment accounts because the banks will pay a higher interest rate. However, the increase could lead to more expensive loans and credit card rates for those who need to borrow, particularly for borrowers who have a variable interest rate.
Those with credit card debt should be particularly wary, as the vast majority of APR rates are variable. Most card issuers will pass on this increase in the form of higher interest rates, since the interest rate on most credit cards is directly tied to the prime rate.
The average credit card interest rate has increased a full percentage point in the last year, and is expected to be raised two more times by the end of the year.