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Fed likely to raise interest rates this week

The decision will boost rates on credit cards and home equity loans

Photo (c) marchmeena29 - Getty Images
The Federal Reserve Open Market Committee meets this week and is widely expected to boost a key interest rate by 0.25 percent.

The Fed meeting, the first under new chairman Jerome Powell, may indicate how aggressive the Fed intends to be in raising its discount rate back to "normal" levels. Rates have not been normal since the 2008 financial crisis, when the Fed cut them to zero percent in an effort to revive the economy.

Since then, the economy has slowly recovered and unemployment remains near historic lows. A 0.25 percent increase in the discount rate this week would only raise it to 1.75 percent.

By comparison, the Fed's discount rate in May 2007, just before the housing market crash, was 6.25 percent.

Rate hike would affect consumers

Whether the Fed raises rates, and by how much, is largely a concern of stock market investors. Rising rates will make stocks appear overvalued and send their prices lower.

However, consumers also have a stake. Holden Lewis, a research analyst at NerdWallet, says a rising discount rate will make it more expensive for both businesses and consumers to borrow money.

"If you have credit cards or a HELOC (home equity line of credit), every Fed rate hike affects your bottom line," Lewis told ConsumerAffairs. "The interest rates on your credit cards and HELOC go up whenever the Fed raises short-term rates."

So if the Fed increases the discount rate by a quarter of a percentage point, that means your credit card interest rates will go up by the same amount. You should notice it in a billing cycle or two.

Three or four rate hikes this year

Last year, when the Fed raised interest rates three times by 0.25 percent, consumers with credit cards and homeowners with home equity lines of credit saw their interest rates increase by three-quarters of a percentage point.

"Expect the Fed to keep raising rates this year, with this being the first of what's expected to be a total of three or four hikes of a quarter-point each in 2018," Lewis said.

That's because all indications show the economy is fairly strong and getting stronger, which raises the possibility of inflation. The Fed policymakers use their discount rate as a way to slow the economy a bit when things start to heat up.

By any measure, interest rates are still very low. Lewis says the Fed will likely use this opportunity to push them back toward normal levels so that it can reduce them again when the economy eventually softens.

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