Fed Rate Increase, what will happen?

It is expected that the Federal Reserve will be hiking the interest rate, this will be the 1st rate increase for the past 9 years. For 7 years the Fed's key rate were at a record low near zero level.

People are asking "How fast and far will the Fed rate will be raise in the coming months?

The Fed is expected to gradually nudge up the rate — 0.25 percentage points at a time, from the near-zero level. Will be sure after a policy statement, economic forecasts and a news conference by Chair Janet Yellen on Wednesday.


JOBS

The U.S. unemployment rate is at 7 year low of 5% with a strong job hiring. This is seen as the final seal for a rate increase. Investors will look to see if the Fed spells out what would constitute further gains in hiring to justify more rate increases in 2016.

INFLATION

The Fed wants to maintain inflation target of 2%, which is not being attained since prices are rising too slowly. Inflation that rise too slow is a sign of underlying economic weakness. It can also cause consumers to delay purchases and make debt repayments more burdensome.

The Fed's key inflation gauge has increased just 0.2% over the 12 months that ended in October. Testifying to Congress this month, Yellen suggested that inflation was being held back by shrunken energy prices and a rising dollar value that reduces import prices.

Economists will monitor how much confidence the Fed signals about the likelihood of inflation going higher. Conversely, they will look for any word on how a persistently low inflation rate might affect the pace of future rate hikes.

GLOBAL ECONOMY

The Fed had been expected to start raising rates back in September, unfortunately it was halted by China's surprise devaluation of its currency. The Fed chose to hold off on hiking rates. Feds monitors overseas economic weakness and a higher dollar will hurt US manufacturers by making their goods more expensive in other countries.

FUTURE RATE HIKES.

If the Fed increase the rates this Wednesday, future increases will be slow and incremental since Yellen rejected the possibility bringing back the old formula they used from 2004 to 2006, when it raised its target for the federal funds rate by a quarter-point at 17 consecutive meetings.

What is it for you?

Don't expect abrupt changes for the mean time. Once it is increased you will see:

- A slightly higher yield in your savings accounts and certificates of deposit, however it will still be small.
- cost of borrowing will rise, but only slightly, with variable effects on what banks charge for credit cards, home equity lines of credit, adjustable-rate mortgages, auto loans and some student loans.

According to BankRate.com, the average bank interest rate is 0.08% for savings account and 0.10 % for money market deposit account.

The average yield on a one-year certificate of deposit is just 0.27% compared with about 3% or higher in 2008.

-  Bond prices tend to fall if there are rate hikes.
- Home Mortgages has no direct link to Fed interest rates, the Fed controls a key short-term rate, while 30-year fixed-rate mortgages are generally priced off the 10-year Treasury bond, which is influenced by a variety of factors, not just short-term rates but also the outlook for inflation and long-term economic growth here and abroad.

Still, some home loans are more directly influenced by the Fed’s action, including adjustable-rate mortgages and home equity lines of credit, which generally carry variable rates.

- Credit card debts with variable rates that averages about 15% today can expect their rates to rise within one or two monthly cycles.

- Student loans, federal loans carry a fixed rate, but the crop of new loans reprice each July based on the 10-year Treasury bond. Private student loans generally base their fixed and variable rates on the Libor index, which generally tends to track the Fed funds rate pretty closely.