The Federal Reserve, the nation’s central bank, raised a key short-term interest rate on Wednesday, for the first time since 2006.
It was a small jump — a quarter percent — but the Fed indicated there could be more to come next year.
Here is what you need to know:
Q. Why did the Fed raise the key rate?
A. The Fed has kept the federal funds rate, which influences many other short-term interest rates, at historically low levels as it sought to boost the economy during the steep recession and the slow recovery afterward. Now the Fed wants to forestall inflation as the economy gains speed by, in essence, gently applying the brakes.
The federal funds rate has been kept between 0 percent and 0.25 percent since late 2008. The Fed is now targeting a range of 0.25 percent to 0.50 percent.
Q. Will my mortgage or home equity loan payments go up?
A. Not if you have a fixed-rate mortgage. But if you have a variable-rate loan, your payment may go up — when it comes time to reset the rate.
Q. I’m thinking of buying a house next year. Will I find mortgage rates higher when I apply?
A. Possibly, especially if the Fed follows yesterday’s action with further rate increases. That possibility has some, including Chuck Price, lending vice president for Westbury-based Nassau Educators Federal Credit Union, concerned that higher mortgage rates could exacerbate Long Island’s shortage of affordable housing for young people, by raising monthly payments for principal and interest. “I think we’re going to see more millennials pool and maybe buy a house together — rather than pay rent,” he said.
Q. How quickly will variable interest rates rise on charge cards, business lines of credit and home equity lines?
A. Some large banks have already increased their “prime rates” — what they charge their best customers — following the Fed’s action. Soon after, interest rates on those loans, pegged to banks’ prime rates, will follow.
“Prime rates will go up pretty quickly,” said Christopher Giamo, metro New York regional president for TD Bank.
Q. How much more will I earn from savings and CDs?
A. Not much at first, said Price. Such rates aren’t directly tied to the federal funds rate. Noticeable increases probably won’t occur until late next year, he said, after further Fed rate increases. “The rate Santa is not coming on December 25,” Price said.
Q. Will the increase affect the value of investments in my IRA or 401(k)?
A. It could. The market value of traditional fixed-rate bonds usually declines as interest rates rise because investors are attracted to higher yields elsewhere, said Jesse Mackey, chief investment officer of 4Thought Financial Group in Syosset.
Q. What will be the effect on the economy?
A. The central bank said it thinks the economy is strong enough to handle a mild rate increase.
Many observers say there isn’t much margin for error. Michael N. Vittorio, president and chief executive of First National Bank of Long Island, said there already are serious concerns about the strength of the recovery. “The economic data is really all over the place,” he said. “A lot of it is still indicating that the recovery of the economy is still very fragile.”