In December of last year, the Federal Reserve Board raised its benchmark Federal Funds Rate for the first time in more than a decade. Before the move, economists warned consumers to brace for a jump in the interest rates they pay on mortgage loans, auto loans, and credit cards.
But a funny thing happened: pretty much nothing.
Consumer interest rates haven't jumped much, if at all, since the Federal Reserve's move. That's good news for consumers who haven't had to pay more to borrow money. But it does lead to a big question: How long will the low interest rates on mortgage loans and other debt last?
That's a question that no one can accurately answer. And, as now apparent, it's one that the Federal Reserve Board might be able to influence but won't be able to directly control.
The Fed's Move
The Federal Funds Rate is important: It affects the interest rates that banks charge on important consumer products such as mortgage loans, personal loans, auto loans, and credit cards. But the Federal Funds Rate only influences these rates. They don't directly set them.
That's why consumers haven't seen, for instance, mortgage interest rates budge much from the historic lows at which they still remain.
The Federal Reserve Board had set its funds rate at zero since 2008. Back then, the Fed took this move as a way to help the economy survive the Great Recession. But as the economy has slowly improved, members of the board's Federal Open Market Committee — which guides and sets the Federal Funds Rate — late last year decided it was finally time to increase this key rate.
In December of last year, the Federal Reserve raised the funds rate by 25 basis points, moving it from 0% to 0.25%.
And that's when financial experts predicted significant jumps in the interest rates that consumers pay. We're still waiting for those big jumps to happen. Why?
Influencing, Not Setting
It comes down to the difference between influencing and setting.
Consider mortgage interest rates. Many believe that the Federal Reserve Board sets the interest rates that consumers pay on mortgage loans. It doesn't. Instead, mortgage interest rates are determined by mortgage backed securities, which are indirectly linked to the yield on 10-Year Treasury notes. When yields fall on Treasuries, so does the interest rate on mortgages. Treasury yields fall when demand for notes goes up, such as when the stock market declines (as happened in early 2016) or when the international economy stumbles (as has also happened).
This doesn't mean that the Federal Reserve doesn't have any influence over whether mortgage rates rise or fall. After its meetings, the Federal Open Market Committee releases statements that list the opinions and feelings about the economy that its members hold. If the committee members say that the economy is strong — and their opinions about it are mostly positive — mortgage interest rates tend to rise.
If the committee members instead express negative opinions about the economy, mortgage interest rates will usually fall.
Interest Rates Mostly Stable
Mortgage interest rates have remained at historically low levels for a long time. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage stood at 3.71% as of the week ended March 31. The average rate on a 15-year fixed-rate mortgage loan was at 2.98%. Last year the 30-year stood at 3.70% and the 15-year was 2.98%
The New York Times on March 18 reported that the average interest rate on a 60-month loan for a new car stood at 3.15%. That's up only slightly from a year ago, when this rate was 3.11%.
Variable-rate credit cards have seen their average interest rates rise from December of last year, but only slightly. Bankrate reported that as of Dec. 30 of last year, the average interest rate on a variable-rate card stood at 15.80%. As of March 30, the site said that this average had risen to 15.96%. (See also: Best Low APR Credit Cards)
So, yes, the Fed's rate hike might have had a slight impact on some interest rates but it has had no impact on others. The lesson here? Consumers should pay attention to what the Federal Reserve is doing when it comes to its Federal Funds Rate. And any increase in that rate might influence lenders and banks to raise their own rates.
But consumers shouldn't panic, either, when the Fed does raise this benchmark rate. A higher Federal Funds Rate might not mean skyrocketing mortgage, auto, and credit card interest rates, because lots of others factors are at play.
Have you benefited from low interest rates?