What is Fed rate hike and how does it affects us

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Fed rate hike: Federal Reserve has decided to hike interest rates. This is second time in a decade that the Federal Reserve Open Market committee has decided to hike short-term interest rates. The Fed committee unanimously voted to increase the range of the federal funds rate to 0.50% and 0.75% – it’s a decision that was widely expected and will reverberate through the markets, and make its way to consumers eventually.

One drawback of this: This will lead to less cash flow into the economy. That can lead to slower economic growth, with fewer jobs created and slower wage growth.

In terms of mortgages, which have always been susceptible to rate changes, the hike will affect those with variable rates, especially if more hikes come in the next year. Even a small bump can make a large difference: a 0.75% difference on a $200,000 loan manifests in your mailbox as a $100 bigger monthly bill.

Highlights of this fall

Stocks fall after Fed rate hike, dollar and bond yields jump

Questions to savings accounts: “The most immediate impacts from the Federal Reserve’s decision to hike rates will be felt more among borrowers than for savers, If we see more such moves in 2017, then savers should see better rates of return, generally speaking.” Mark Hamrick, a senior economic analyst at Bankrate.com, told Yahoo Finance.

These hikes trickling down into your accounts will be a slow process, so don’t expect anything soon. The Fed itself studied these “sticky deposit rates” a few years ago in 2013 and found the significant lags cost depositors $100 billion per year when rates rise.

This is Fed's second in the last decade and was widely expected across the market. But investors were surprised to see the Fed project three more increases for 2017, up from a prior forecast of two. Higher rates can slow corporate profits and economic growth.

If you’re looking for higher interest rates for your deposit accounts, however, one way to do that besides waiting is to look at online savings accounts. As long as you don’t have to deposit cash very often—there are no local branches—you can take advantage of giant 1% rates on accounts, made possible by the bank’s infrastructure savings. Said Hamrick

The Standard & Poor's 500 index also fell to 18.44 points, or 0.8 percent, to 2,253.28, its biggest percentage loss since mid-October. The Dow Jones industrial average fell 118.68 points, or 0.6 percent, to 19,792.53. The Nasdaq composite fell 27.16, or 0.5 percent, to 5,436.67.

Normally, if inflation is too low, the remedy would be to cut rates, not raise them. So why did the Fed decide higher rates were in order? The Fed is concerned that inflationary pressures can build up over time, and that there can be a lag between Fed decisions and the resulting impact on inflation. In other words, it’s worried that if it were to keep interest rates low for the next few months, it might find itself with surging inflation in 2018 — and be forced to raise rates more drastically to deal with the problem. That, in turn, could trigger a recession.

So the Fed is hoping that slowly and gradually raising rates — it did its first post-recession interest rate hike a year ago — will strike a careful balance between the twin dangers of inflation and recession.

The potential downside here is that a premature rate hike could prevent the economy from enjoying a robust economic boom. By some measures, the current economic recovery has been the weakest in decades, and some economists wonder if easier monetary policy could deliver a more robust economic expansion. But so far, that argument doesn’t seem to have changed the minds of Fed decision-makers.

Source Input( Read more on): https://finance.yahoo.com, http://www.vox.com



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