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How will the Fed Rate Hike Impact Me?

On March 14, 2017, the Federal Reserve Bank announced it had increased its target range for Federal Funds, or Fed Rate, by 0.25% to a target range of 0.75 percent to 1 percent.
The Fed Rate applies to funds loaned by banks to each other but it is supposed to be the bedrock interest rate which affects all others. Unfortunately, it doesn’t work that way in practice. The market sets all other interest rates and the market always acts to further its own interests. So, different interest rates, like mortgages, short-term debt, and savings are each affected differently.

Mortgage rates: The Fed rate increase has been anticipated for some time (the surprise would be if they had not raised rates.) The yield on the 10-year Treasury note, which is used by banks to price mortgages, has been moving up since the election; mortgage rates are up, but not due to the Fed’s action.

Short term credit: Banks price their shorter-term loans off their cost of funds, which just went up.
Not by a lot, true, but the Fed is considering additional increases in the fed rate over the course of the year as it works its way back from 0% to a target of 3%. Consumers will feel these rate increases in the cost of their short-term loans like credit cards and car loans.

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Savings vehicles such as CD’s and Savings Accounts: This is where the link to the Fed Fund rate breaks down. Banks have been reluctant to increase the rate they pay for savings accounts and CD’s for a couple of reasons. First, the extended period of low-interest rates has harmed bank profitability and they have been waiting for relief from the Fed to increase the spread between their cost of funds and the rate at which they make loans. Second, loan demand has been decreasing and the banking industry at large has plenty of deposits at present. Danny Skarda, President of Amarillo-Based Herring Bank, said their savings rates would be increasing immediately. “This Fed rate hike of 25 basis points will obviously be an increased cost to the borrowing community but we also increased our deposit rates accordingly.”

How will the increase in the Fed rate impact you?

3-Month CD’s will rise from .15% APY to .25% APY, 1-Year CD’s adjust from .45% APY to .70% APY, and savings accounts climb anywhere from .10% APY to .15% APY depending on the specific account. The rise in savings rates should benefit consumers and small businesses, both. Skarda is optimistic about the future for individuals and small businesses. “We do not expect this rate hike to curtail loan demand significantly going forward and anticipate more deposits coming into the banking industry.”

To learn more about the impact of the recent Fed Rate Increase or to open or upgrade your current accounts visit us online or call 888.283.4564.

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