Twelve ways a Federal Reserve interest rate hike can affect us.

The Federal Reserve (The Fed), or the U.S. Central Bank was created in 1913 as part of the Federal Reserve Act.

The Fed has the power to change interest rates, and “print money” among other powers.

The Fed Funds Rate, controlled by the Fed, is the interest rate at which banks and credit unions actively trade balances of the Federal Reserve.

This Fed Funds Rate affects many other rates such as rates on mortgages, car loans, and other big ticket items.

The Fed Funds Rate right now is 0%, and the Federal Reserve usually raises rates in 0.25% increments.

How might a Fed rate hike affect us? 

1. Mortgage rates could increase making homes less affordable, and those home owners with a variable mortgage will be affected.
2. Credit card interest rates, and car loan interest rates would rise, making it more difficult for people.
3. The Savings rate on Savings Accounts would increase. This would benefit savers.
4. A rise in interest rates could create stock volatility. The Stock Market prefers lower interest rates.
5. Those who “Follow the Fed”, may become more cautious about U.S. stock investments.
6. A rise in interest rates, reduces the value of bonds and hurts bond holders.
7. A decrease in the value of the bonds means that the bond’s yield increases, and makes new investments in bonds more attractive.
8. If bonds becomes a more attractive investment, that means money might be taken out of more risky assets such as U.S. or International equities.
9. Raising rates could slow down the economy, and if the economy was growing at 0%, then the economy could have negative growth, and a potential recession could occur.
10. Raising rates could reduce inflation.
11. Rising U.S. rates could hurt foreign markets. In general, U.S. rates increasing helps strengthen the value of the U.S. dollar, and this would attract investments in riskier emerging markets and other riskier investments to be invested in the U.S.A.
12. Emerging Markets and foreign markets who have borrowed money will face a real-local currency value of the debts, and rising U.S. interest rates may push emerging market rates higher, and increase the interest rate on the debt.