Rates have been near zero for too long. For the first time in almost a decade the Federal Reserve Bank is poised to raise rates. Fed Chairman Janet Yellen wants to send a signal that the economic recovery is real.
Good News and Not So Good News
The good: The reason the Fed is signaling higher rates ahead is because its leaders feel that the economy is getting strong. That’s good news. Also good, deposit rates will increase. After seven years of earning virtually no interest, savers will begin to get some kind of return. But don’t get too excited, the rate hike will likely not be much and the Fed will likely take a measured approach making small increases very gradual.
The not so good: Increasing rates on bank deposits will create competition for investment dollars potentially pulling some money out of the stock market which has been the only place to get a decent return for several years now. Some economists feel that, due to low rates, investors have actually increased the risk in the ecomony by seeking higher-returns in the stock market. There may be truth to this and that will be one reason Yellen feels compelled to move now.
Of course, when rates go up banks increase the prime rate. This will impact loans with variable rates right away. Rates for credit cards, consumer loans, home equity loans, private student loans, etc. will rise immediately. Mortgage rates will be impacted although a little more slowly.
So, expect variable rate loans to begin to re-price very quickly. Expect deposit rates to increase moderately but over a longer window because raising rates on deposits costs banks dearly. So expect them to move slowly.