How will the upcoming March rate raise affect consumers?

Given today’s technology, media and information sources, it’s no secret that The Federal Reserve Board (A.K.A. The Fed, Greenspan or Bernanke) is going to raise short term interest rates by .25% at its meeting on 3/28 and 3/29. But, what exactly does this mean and how does this affect consumers?

The Federal Reserve Board’s job is to influence the availability and cost of money and credit to help promote national economic goals and the overall well being of our economy. By making money and credit more or less readily available, The Fed heats up or cools down the economy. The Fed does so with adjustments to the Federal Funds Rate. This is the rate which The Fed raises or lowers in .25% increments at its widely publicized meetings every six weeks or so. The Fed raises or lowers this rate mainly in conjunction with inflation. When the economy is in danger of overheating and experiencing inflation, the Fed raises the Federal Funds Rate as a means of making money harder or more expensive to borrow. In theory, this action controls inflation. This pattern occurred from roughly June of 2004 to present with the raising of the Fed Funds rate from 1.0% to 4.5%. From 2001 to 2004, we saw the opposite trend occurring. The economy was in danger of under performing. As a result, The Fed continually lowered the Fed Funds Rate, making money easier to borrow in an effort to spur spending, hiring, production and taxes.

The Federal Funds Rate is the overnight lending rate at which banks charge each other to borrow money. In layman’s terms, the Federal Funds Rate directly and immediately affects the Prime Lending Rate and interest rates on credit cards, car loans and home equity lines of credit. As well, the indices (LIBOR or Treasury) that short term mortgages (1,3,5,7 Yr ARM etc) are based upon are directly effected by the moves in the Fed Funds Rate. So, if you have such a loan or credit card balance, be aware as the payments may be fluctuating with these increases.

However, its widely unpublicized that when the Fed raises the short term lending rate, long term mortgages bonds (i.e. 15, Year Fixed Rate Mortgage and 30 Year Fixed Rate Mortgage) are often oppositely effected and the rates remain more or less neutral. Long term bonds and mortgages react to the increasing or decreasing threat of inflation. By raising the short term interest rate and controlling inflation, pressure on long terms bonds subsides and their rates remain neutral.

This is a very brief synopsis of a complex process. Please do not hesitate to contact DesPortes, Selig & Associates for more explanation. You may also reference www.federalreserve.gov

William DesPortes
DesPortes, Selig & Associates
Professional Mortgage Services
Managing Member
970-949-0653
wdesportes@qwest.net

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