What a Fed rate hike means for you

And it might mean there’s a fear of the economy heating up too quickly and leading to inflation. But the hotel- and warehouse-building craze may be winding down, he adds, and a modest rise in rates could discourage some activity in those industries. Whether it’s a significant impact is another question.

Wake points out that often what people expect determines what they do. Mortgage rates and auto loans, among other expenses, are expected to jump up eventually, he says, but it could take months or even years for the changes to take place.

Interest rates on new federal student loans are tied to rates in the financial markets and are reset annually for new loans.

As the BOK’s Monetary Policy Committee froze the rate at 1.5 percent last Thursday, Gov. Lee made it clear that there would be no immediate reaction to the Fed’s expected action.

As for mortgage rates, Conway reiterates that the increase won’t be so sudden, either. After taking account of underlying inflation that Yellen reckons is now about 1.5 percent to 1.75 percent, the benchmark borrowing cost will still be well below zero in real terms – and still below the neutral rate. “The fed funds rate is tied to what the prime rate does and that’s about three percentage points above the fed funds rate and that links to credit cards”, Conway said.

The first rate hike of the recovery is expected for the FOMC meeting announcement at 2:00 p.m. ET, lifting the fed funds rate to 0.375 percent from a range of zero to 0.25 percent. Unlike some past tightening cycles – when rate hikes were created to combat rampant inflation of the 1970s or curb the “irrational exuberance” of the late 1990s – this round of hikes follows improving conditions.

“The public doesn’t think the government should be in the business of bailing out banks”, he says.

OCBC Bank economist Wellian Wiranto said Asia might soon have to grapple with “a potential new reality of scarcer liquidity, higher rates and a stronger dollar in the post-lift-off world, which would continue to make the operating environment that much tougher”. If home buyers expect mortgage rates to increase, they will act as if rates are increasing even if they don’t. Investors will probably need to hunt for higher yields. Instead, the central bank hopes to manage the fed funds rate by changing two other rates: the interest it pays to banks for reserves held at the Fed and the amount it pays other financial institutions, such as money market funds, for short-term trades known as reverse repurchase agreements.

No one should want to lend to anyone for less than they can get from the Fed, as the Fed’s promise is guaranteed by the state, and is as such seen as risk-free. In fact, it is now set at 0.25%-the supposed ceiling. And that model contains what San Francisco Fed President John Williams has called a “magical” variable to help determine the natural rate, or R*, in economists’ jargon.

Part of the reason for this selloff is the expectation of rising rates.

“Don’t let anyone scare you”, said Moisand, who also is a regular columnist for FLORIDA TODAY”.

“The economy is doing well, but it’s not booming” said John Silvia, chief economist for Wells Fargo & Co., in Charlotte, N.C. “Where is the push to increase rates any further?” “I feel the case for liftoff is compelling”, he said during a speech early this month in Florida. And the number of people quitting their jobs, a sign of confidence in the job market, rose to 2.78 million.

If you hike rates, this slows the rate of lending and spending, helping to cool an economy that may be running too hot and approaching bubble territory.

It is very important to understand that the 30-day federal funds futures is merely one of the many barometers used to judge rate hike timing.

Selling these bonds would drain reserves from the banking system, prompting banks short on cash to bid the FFR up in turn.

As for stocks? That’s mixed. Investors would evaluate their positions as the USA prepares for a rate hike.

“From an investment standpoint, if the size and timing of an increase is critical to you, you may not be truly investing”, Moisand said.