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Susan Tompor: How to plan for next round of Fed interest rate hikes

June 18, 2018


The easy money officially ends Wednesday, as interest rates, much like summer temps, heat up once again.

It’s a "slam-dunk" that the Federal Reserve will increase rates by a quarter point after its meeting this week, according to Mark Zandi, chief economist for Moody’s Analytics.

And it’s likely we’re in for two more quarter-point hikes in September and December, he said.

"If you are thinking about buying a car or home, sooner is better than later, but I wouldn’t rush into anything, as rates, while rising, are still very low," Zandi said.

The U.S. economy — with a national jobless rate at 3.8 percent in May, the lowest level in 18 years — has put the Great Recession in 2008-09 in the rear view mirror. Consumers — as well as business leaders — are formulating strategies to cope with higher rates ahead.

The Fed began gradually tightening money with the first quarter-point rate hike in December 2015 — then the first rate hike in nearly a decade. Since then, there have been another five rate hikes. The latest rate hike in March took the Fed’s benchmark rate to a target range of 1.5 percent to 1.75 percent.

If the Fed raises rates as expected Wednesday, the overnight borrowing cost will be in line with the Fed’s inflation target of 2 percent. For the first time in almost a decade, the cost of borrowing will no longer be essentially free. Say good-bye to super-cheap cash.

If the economy keeps doing well, some expect two or three more rate hikes in 2019, too.

The Fed noted in its statement in March that the "labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low."

We’re hearing business news that makes sense in a higher rate environment. Flagstar Bank announced last week that it plans to acquire 52 bank branches from Wells Fargo, including 14 in Michigan’s Upper Peninsula.

The strategy includes snagging 200,000 more customers as a way for Flagstar to gain lower-cost deposits to support loan growth and move away from higher-cost borrowing from the Federal Home Loan Bank of Indianapolis.

The acquisition — which adds about 49 percent more bank branches to the total Flagstar network — should be a positive move in a "rising interest rate environment," wrote Bose George, banking analyst for Keefe, Bruyette & Woods, in a report Tuesday.

Flagstar’s acquisition, which could be completed in late October, is another sign that the bank, which relied heavily on national mortgage banking, is putting its deep troubles from the financial crisis behind it.

Financing arms of automakers are expected to depend more on their in-house lending arms to finance the purchase of cars and trucks as rates go up. Fiat Chrysler Automobiles announced plans to rebuild its own captive finance arm either via a start-up or through an acquisition.

The old Chrysler Financial had once been the captive lending arm of the automaker before the financial meltdown in 2008-09. Its operations were reduced as part of a U.S. government-sponsored bankruptcy restructuring of Chrysler in 2009.

Cerberus Capital Management later announced an agreement in December 2010 to sell Chrysler Financial to TD Bank Group.

Captive finance arms — like those at Ford and General Motors — can subsidize loans to qualified buyers and finance inventories as other lenders limit their exposure to auto loans in a weaker economy.

Consumers, too, need to plan for the inevitability of higher interest rates ahead. Here are some rate hikes to watch:

Higher rates are ahead for student loans

The interest rates on new federal student loan interest rates are set to jump higher July 1.

The fixed interest rate on federal student loans will increase to 5.045 percent, up from 4.45 percent for undergraduate Stafford loans.

The rate goes up to 6.595 percent, up from 6 percent for Stafford loans for graduate school.

Parents who borrow to help out their college age children can expect to pay 7.595 percent, up from 7 percent, for the federal parent PLUS loans. The same rate applies to the Federal Grad PLUS loans.

Interest rates on existing loans do not change, said Mark Kantrowitz, publisher and vice president of research for Savingforcollege.com.

The increase only affects new loans made on or after July 1. Kantrowitz said the new rates are based on the last 10-year Treasury Note auction in May.

The rates will apply to new loans made beginning July 1 through June 30, 2018. The July 1 rate hike does not apply to private student loans.

Monitor mortgage rates if home shopping

Tailwinds right now indicate that mortgage rates will be trending higher in the months ahead. The 30-year fixed rate is expected to move closer to 5 percent by year end and possibly nearer to 5.5 percent by June 2019, according to Keith Gumbinger, vice president for HSH.com.

The average 30-year fixed rate was 4.54 percent last week, down from 4.56 percent a week earlier. By contrast, the 30-year rate averaged 3.89 percent a year ago.

"A lot depends on inflation and the Fed," Gumbinger said. "Some economists are predicting that the next recession might show up in perhaps 2020."

By late 2019, it’s possible that mortgage rates would be at their peak and then trend downward if the economy turns more sluggish and moves into a recession, he said.

Credit card rates are edging higher

Most credit card rates are variable — meaning they will edge higher with each rate hike by the Federal Reserve.

The average variable rate was 16.75 percent in early June — up from 15.83 percent a year ago and as low as 14.99 percent in June 2015 before the Fed’s first modest rate hike in December 2015, according to CreditCards.com.

Higher interest rates mean more of your spending money is going toward paying down existing debt on credit cards.

Some families who are already living paycheck to paycheck could want to carefully take steps to pay down what credit card debt they can going forward.———

 

 


Associated Press