Following the dotcom bust in the early millennium, the United States Federal Reserve viciously slashed rates in an effort to avoid a recession.
Their method seemed to have been successful and, as the lower rates worked their way into the market, the economy expanded.
Since this time, Americans have witnessed the bursting of the housing bubble and the financial crisis of 2007-2008.
December 2015 marked the first time the Federal Reserve had raised taxes in nine years and many people expressed worries.
To ease your nerves, I’ve compiled a list of the top three things you should know about the upcoming Federal Reserve hikes.
HIKES WILL BE GRADUAL
As mentioned, December 2015 marked the first time the Federal Reserve has raised the interest rates in nine years.
The Federal Open Market Committee reportedly predicts that interest
rates at the end of 2016 will be sitting at 1.375%, which reportedly means at least four more hikes between now and then.
Since the Federal Reserve raised the interest rates in December, the economy has seen a downturn. Oil prices have dropped, the stock market has been uncertain, while the global economy is rife with signs of potential trouble.
If this continues, the hikes will likely be delayed until the economy regains its traction. However, if these conditions prove temporary, the Federal Reserve has publicly stated that it will be “ready to hike rates more quickly than anticipated”.
THERE’S TIME TO PREPARE
Greg McBride, the chief financial analyst at Bankrate.com, has stated that “the rising interest rates will take some time to show a cumulative effect”
With more than 41% of surveyed Americans admitting to being worried about the hikes, McBride states that now is the time to prepare for any potential stir-ups.
Despite the gradual effects of raised rates, the vice-president of Ross Mortgage Company (in Franklin, Massachusetts) has stated that “even something as small as one-eighth increase in interest rates can alter the affordability [of a house] for countless consumers”
And indeed, McBride advises consumers to attempt to refinance away from an adjustable rate mortgage to a fixed to one with a fixed-rate, and to locate 0% balance transfer credit card (if possible).
When the Federal Reserve hikes their short-term interest rates, banks and other lenders tend to follow suit.
HIKES ARE A SIGN OF A GOOD ECONOMY
People often fear a rise in interest rates without considering the hike in its proper context. When the economy is doing poorly, rates are lowered to promote spending and to deter a recession.
Rates tend to rise when an economy is in good shape, and a good economy generally includes a “healthy” housing market. Considering the recent financial instability the US has been experiencing, these hikes may be quite a way’s away.