Fed Increases Interest Rates by 0.25%: What’s Next for the Economy?

fed raises interest rates

Today, the Federal Reserve increased its Fed Funds rate by a quarter percentage, resulting in a target range of 0.75 and 1.00 percent.

The fact that the Fed raised interest rates wasn’t entirely unexpected, and stocks saw a small jump at the time of the release. Because this rate hike was widely anticipated, stocks aren’t expected to make a huge move during the rest of the session.

Most of the 10 voting members of the Federal Open Market Committee agreed to the interest rate hike. Only Neel Kashkari voted against the increase.

Fed expects inflation to reach 2 percent target

Part of the Federal Reserve’s mandate is to encourage maximum employment and price stability. As a result, the agency generally targets a 2 percent inflation rate.

Right now, inflation is below that target. However, Federal Reserve Chair Janet Yellen explained in the release that they expect to see that target reached over the medium term. With the PCE inflation index at 1.9 percent, the Fed believes gradual rate increases will keep inflation from running out of control.

The Fed doesn’t foresee PCE exceeding 1.9 percent in 2017.

Could we see more rate hikes this year?

As the Fed raises interest rates now, it’s likely they’ll continue to increase rates this year. Because Yellen and other Fed members see continued economic growth, experts forecast two more rate hikes before 2018.

The timing depends on the economy, but analysts at Morgan Stanley expect a rate hike in June and another in December.

Forecasts from the Federal Reserve also show imminent rate hikes in 2018, assuming the economy continues to grow at a modest pace in the coming months. The Fed’s forecast for GDP growth in 2018 is 2.1 percent. The Fed also expects the unemployment rate to drop to 4.5 percent by 2019.

What does it mean for you when the Fed raises interest rates?

The bottom line when the Fed raises interest rates? Get ready to pay more on your debt.

If you have variable rates on your debt, including credit cards and home equity lines of credit, you could see an increase in your interest charges.

On top of that, other rates are likely to rise. Mortgage rates are loosely influenced by what happens with the Fed Funds rate. Car loans are also likely to see higher rates. As the Fed raises interest rates, the cost to borrow money goes up. Your new loans will come with higher price tags.

Even though federal student loan rates are set by Congress, it doesn’t mean they aren’t impacted. Congress takes into account the market when deciding what to do. As a result, they could decide to raise student loan rates, too.

Some benefits of a Fed rate hike

A Fed rate hike isn’t all bad, though. Some consumers see positive effects.

Higher interest rates generally mean higher yields on deposit accounts. Your savings accounts, CDs, and money market checking accounts could see increases in yield.

Today, the stock market is extending earlier gains on the news of the Fed rate hike, as well as Yellen’s assessment of continued economic growth.

Investors are seeing some gains but those could be short-lived, depending on how the economy fares and the pace of Fed rate hikes over the next few months.

In general, the stock market sees bigger gains when the Fed cuts rates. However, if the Fed paces itself, there’s a chance that the market will respond favorably.

Read more about the Federal Reserve’s impact on your wallet

You might be surprised at the effect the Federal Reserve can have on your finances. Learn more about how the Fed Funds rate influences your money:

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