What Does the Current Rate Environment Mean?
You may have seen news about the Federal Reserve (usually referred to as the Fed) raising rates. What they’re increasing is the Federal Fund Interest Rate. In fact, they’ve done it four times this year, and nine times since December of 2015. Increasing the rate from 0.25% to 2.50% over that timeframe. Prior to that, the Federal Fund Interest Rate, which is the rate banks charge other banks for overnight lending, hadn’t changed since 2009.
The Fed used to change the rate all the time, depending on a ton of different factors. Even with recent blips in the stock market, the Fed sees the economy doing well. Increasing the Federal Fund rate is its way to keep inflation in check.
With all that being said, the Fed Fund Rate does impact the financial landscape in a multitude of ways. Most notably it effects the interest rate for loans, either directly or indirectly, and the interest rate on share accounts.
The Federal Funds Interest Rate does not itself effect the rate people pay on consumer rates, but it does have a direct impact on how the prime rate is calculated. Prime, is the rate that most often determines the benchmark for home equity lines of credit and adjustable rate credit cards.
Not all loans use the prime rate though. Adjustable rate mortgages use the COFI or Libor indexes. Many of WCU’s loans aren’t based on any of these indexes. Instead they are based on our calculations to get the best possible rate for our members. Those loans include our vehicle, personal, and mortgage loans. Even though these rates aren’t directly related to any indexes, they do tend to go up and down with other rates. That’s why it’s a good idea to refinance your mortgage if you took advantage of a low rate on an adjustable rate mortgage, usually 5/1 or 3/1 Arms.
Rising Federal Fund and prime rates aren’t necessarily bad for people. The higher loan rates often go hand-in-hand with higher rates on savings and investment products. At the credit union, we offer dividend on share accounts. As the cost to financial institutions to borrow money increases, it makes more sense for us to use our own deposits to back our lending activity, instead of borrowing from other institutions. The dividends for certificates and money market accounts, are both increasing, and we’re going to be offering special certificate rates for IRAs in January.