What a Fed Rate Hike Means for Your Money

With a Fed rate hike on the table when the Federal Open Market Committee (FOMC) meets Dec. 15-16, Americans need to start thinking about how it will affect them.

When the U.S. Federal Reserve raises rates, its widespread impact may surprise some people since the last time we had a Fed rate hike was 2006.

A Fed interest rate hike will affect more than the markets. Just about every interest rate keys off the Fed rate in one way or another. That includes many interest rates that have an impact on consumers.

Here's what you can expect when the Fed raises rates.

How a Fed Rate Hike Will Hurt Consumers

• Credit card rates: Most credit card interest rates are variable, so a Federal Reserve rate hike will mean a boost to the rate applied to your monthly balance. While you won't much notice an increase of 0.25% (it's about $1 more on a balance of $5,000), a string of Fed rate increases could start to pinch your budget. Keeping balances low will minimize the impact of any rate hikes. Of course, if you pay off the card in full each month, the interest rate the bank charges doesn't matter.
• College loans: Private student loans often have variable rates as well. So a Fed rate hike will increase the interest rate on a lot of student loans, making that debt a little bit harder to repay.
• Mortgage rates: If you have a fixed-rate mortgage, a Fed rate hike won't affect you. But those with adjustable rates will see an increase at their next reset period (usually either monthly or annually). Most of those with a home equity line of credit (HELOC) will also see a rate increase, which will take effect within a month of any Fed rate hike. Anyone thinking about buying a home or refinancing a mortgage should try to snag a lower rate before the Fed makes its move.
• Auto loans: The connection between auto loans and the Fed rate is less direct, but if interest rates are rising generally, auto loans will be affected eventually.

But the news isn't all bad. Here are the ways consumers can benefit from a Federal Reserve interest rate hike...

How a Fed Rate Hike Will Help Consumers

• Savings accounts: The Fed policy of holding interest rates near zero for years has been devastating for savers. The rates on interest-bearing accounts and certificates of deposit have been so low that returns on both have been negligible. A Fed rate hike won't fix that overnight, but it will start to improve the situation. If the Fed continues to raise rates, CDs will again become a worthwhile investment.
• Annuities: Folks approaching retirement - and we know there are a lot of them as the Baby Boomers graduate to the senior citizen class - will get a better deal on annuities when the Fed raises interest rates. Wait as long as you can, though. Most annuities lock in the rate, so the longer you wait, the more likely you'll benefit from a future Fed rate hike.
• Cheaper travel: If you like to travel abroad, the Fed rate hike will save you money via a stronger U.S. dollar. Having anticipated an increase in the Fed rate for a while now, the foreign exchange markets already have made the dollar much stronger. Future increases and easing by other central banks could add even more to the dollar's value. That means your dollar will buy more when travelling just about anywhere in the world.

How a Fed Rate Hike Will Affect Investors

• Stocks: Despite all the hand-wringing on Wall Street about a Fed rate hike, it won't hurt stocks that much. And because it's been talked about for so long, much of the impact of the first rate increase is already baked into the market. However, some stocks will feel the impact more than others - namely, those carrying a lot of floating-rate debt. And companies with junk-rated debt could get hit particularly hard.
• Bonds: A Fed rate hike will increase the yield government bonds pay to investors, making them a more attractive "safe haven." Short-term bonds will benefit more than long-term bonds. But existing bonds will lose value as investors gravitate to the better deal of new bonds with higher yields.
• Gold and oil: As noted above, a Fed rate hike strengthens the dollar, and that hurts the prices of commodities like gold and oil. The expectation of Fed tightening is a big reason for lower gold prices. Oil faces a double whammy from a Fed rate hike in that many U.S. shale oil producers took on a lot of cheap debt while interest rates were at historic lows.

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