Interest rates heading higher this week - What it means to you:

posted by Brian Mudd - 

Interest rates heading higher this week - What it means to you:

Bottom Line: The Federal Reserve starts it's most recent two day meeting today. When they're done tomorrow the most likely outcome is the second interest rate increase of 2017 (and the fourth since December of 2015). We've been somewhat fortunate that despite rising interest rates, the largest loan most of us have, the mortgage, has actually been one of the least impacted (we've actually had the lowest mortgage rates of 2017 within the past month). That being said the trend is in and it's higher for rates. That shouldn't be taken for granted. 

When the fed raises rates it doesn't directly hit you right away. It's the rate charged to lenders by the Federal Reserve. Right now that rate is .75% to 1%. The most likely outcome is that as of 2 pm tomorrow it'll be 1%-1.25%. That'll be the first time in eight and a half years the rate will be north of 1% (October of 2008). We've been lulled into a sense of interest rate complacency for years due to the Great Recession and the super weak recovery ever since. Interest rates have remained low because real inflation has remained rather low because economic growth has been so weak. The last year that the US had even average economic growth (3%+) was 2005. The federal funds interest rate was 4.25% at the end of 2005. That's important for a couple of reasons. 

First, the average economic growth of the US since the end of the Great Recession has only been 1.8%. That's allowed for a period of extremely lower interest rates. The average estimate for US economic growth this year is 2.4%. That alone would bring about slightly higher rates which we're seeing but what if we do get healthcare and tax reform done? What if we really do get a 3%+ growth economy which President Trump has articulated repeatedly? While we want a better economy - it also would mean a return to normal interest rates. The normal Federal Reserve rate to banks is 4%+. You can do the math. If we get even average economic growth again, we'll likely end up with interest rates that are at least 3% higher than we've been used to. The average 30 year fixed rate mortgage is still 8.5%. We've become spoiled with rates at half that level. We're not going to see those kind of rates anytime soon but if the economy continues to improve, rates will continue to head higher along with it. Times and interest rates have already changed but if we're to take the next step economically - which might be possible with the Trump administration's pro-growth reforms - if they were to pass - what's old with interest rates would be new again for the first time in well over a decade and you should do what you can to lock in fixed rates where possible and pay off variable rate debt as possible.

Brian Mudd

Brian Mudd

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