September Fed update: Bank rate increase delay, how consumers can prepare
September 22, 2016
The Federal Reserve's Open Market Committee announced that it has once again decided not to raise interest rates following its Sept. 21 meeting.
While the outcomes of recent Fed meetings have been monotonously similar, an interesting change this time around was an increase in the number of committee members voting in favor of a rate increase. After the last meeting in late July, just one out of 10 members of the committee voted to raise rates. At the Sept. 21 meeting, that increased to three votes in favor of an increase.
While three votes was not enough, it does indicate a growing sentiment towards raising bank rates. Why might this be? Economic growth remains strong. Now that fuel prices have leveled off, it would not be surprising to see inflation move more in line with the Fed's 2 percent target.
Ready for a bank rate increase? 5 questions to ask
Between growing sentiment for a rate increase within the Fed and favorable economic developments generally, a popular view is that an increase in rates is inevitable, but it is just a question of when.
To check your preparedness for such an action, here are five key questions to ask:
1. Are your CD commitments flexible?
If you are rolling over CD accounts or opening new ones, you may want to be wary about getting too locked into today's low CD rates. This does not necessarily mean limiting yourself to short term CDs. Putting together a CD ladder or looking for CDs with mild early withdrawal penalties are ways you can take some advantage of the higher rates on long term CDs while still having the flexibility to change should rates rise.
2. Are your mortgage rates fixed?
An increase in the Fed rate won't directly set mortgage rates higher, but it could influence them in that direction. If you have an adjustable-rate mortgage, bear in mind that this could push your monthly payments higher.
3. Have you refinanced yet?
If you have not yet refinanced to take advantage of low mortgage rates, don't get lulled into believing that the opportunity to do so will continue forever.
4. Have you acted on any new loan commitments?
If you've been considering buying a home or a car, or borrowing against home equity, you may want to follow through on your plans before bank rates rise.
5. Are your fixed income maturities on the short side?
Long-term fixed income securities are generally most vulnerable to interest rate increases, so this would be a good time to look over your investment portfolio to see if you are comfortable with your current exposure.
The Fed is clearly very sensitive to the impact a rate increase will have. As a result, it has delayed raising rates for as long as possible. Ironically though, putting it off for so long might make it more of a shock when it does occur. That is why it may be particularly important that your finances are prepared.
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