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Short-term borrowing rates inch higher

By Regina Franz, Director of Operations

The Federal Reserve has increased the federal funds rate—what banks charge each other for overnight loans—by a quarter percentage point, pushing consumer and business borrowing rates higher. According to a statement by the Fed’s policy making committee:

The economic outlook has strengthened in recent months. The Committee expects that with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent.

The move is expected to ripple through the economy, helping some and hurting others. Among the beneficiaries :

  • Savers may earn more in the long-run
  • Investors, as long as the economy continues to purr
  • Homeowners with fixed-rate mortgages

On the other hand, borrowers in general will see their costs go up, particularly:

  • Homeowners with adjustable-rate mortgages
  • Credit card holders with adjustable rate cards
  • First-time home buyers locking in mortgages at a higher rate

The impact could be heightened should the Federal Reserve continue to hike rates through 2018 in response to labor market conditions, inflation rates, and financial and international developments. With the economy and inflation on the rise, industry watchers predict two to three more rate hikes may come, creating an even greater impact over time. We will keep you posted.

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