Many consumers, homeowners and smaller businesses will shortly be paying more when they borrow--but not much more--thanks to the Federal Reserve's interest rate hike Wednesday.
But mortgage rates could actually decline from here, despite the Fed's move, because the mortgage market anticipated even more than the Fed's quarter-point rise in its benchmark short-term rate, the federal funds rate, to 5%.
The immediate effect on consumer rates: Bank of America, Chase Manhattan and other major banks raised their prime lending rates from 7.75% to 8%.
"I think you would see an industrywide increase of a quarter-point by the end of the week," said Wayne Ayers, chief economist at BankBoston. "The Fed would expect that and want to see it as well."
Tied to the bank prime rate are rates for many home-equity loans, credit card balances and small-business loans.
Even on a $20,000 home-equity loan, that would be only an added $50 in interest over the course of a year, some or all of which may be tax-deductible.
Although variable-loan rates linked to bank prime rates will move quickly, the Fed move's effect on credit card and other consumer loan rates sometimes may be hard to see because these rates have been moving for unrelated reasons.
In particular, consumer lenders have increasingly divided consumers into low-risk borrowers, who have been able to obtain interest rates as low as 9.9%, and higher-risk borrowers, who still pay well over 20%.
Longer-term rates, such as 30-year fixed mortgages, are determined by market forces--as opposed to Fed edict--and have already risen sharply this year, partly because the economy is so strong that the demand for credit has shot up, and partly because of expectations that the Fed would act.
Rates on 30-year loans, for example, are hovering around 7.6%--more than a percentage point above the bargain rates hit Oct. 9.
In California, a quarter-point change in mortgage rates translates to about 1% fewer households that can afford a mortgage for the median-priced home in their county, according to the California State Realtors' Assn.
But because the Fed on Wednesday withdrew its official bias toward higher rates in the future, this week's move actually may have no effect--or even allow some easing of mortgage rates.
Indeed, the 10-year Treasury note yield, a benchmark for mortgages, plunged to 5.79% on Wednesday from 5.93% on Tuesday and now is at its lowest since June 17. The yield peaked at 6.04% last week.
As for savers, banks will probably raise rates on large CDs--those of $100,000 or more--but observers do not expect much if any change in smaller-denomination CDs or money market accounts.
Yields on large CDs are up about 0.40 percentage point since the middle of last month, but a typical small consumer CD hasn't changed.
"Most banks have not been competing aggressively for small deposits," Ayers said. "And there's certainly nothing automatic, that's for sure," about raising rates on small CDs after the Fed's action.
Even as Treasury bill yields have risen since April, average small CD yields have been flat. The yield on six-month T-bills, now 5.04%, is up 0.46-point from 4.58% on April 25. But the average nationwide six-month CD yield is barely higher: 4.23% now versus 4.20% then, according to RateGram.
For consumers, the Fed's current rate stance means borrowing and spending will remain fairly easy. "The economy is going to have a freer rein to grow," said Paul Kasriel, economist at Northern Trust Corp. "It would take something of clear signaling of inflation for the Fed to increase rates [further]."
But Kasriel cautioned, "The odds of another 25-basis-point [quarter-point] rate increase have been reduced, but not been eliminated."
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
The Fed's move to raise interest rates will filter through consumer savings and lending rates, although many market rates rose this year in anticipation. Major rates as of Wednesday:
item Wed. rate 30-yr. mortgage 7.65% Prime rate 8.00 11th District* 4.48 Avg. credit card 17.5
* Cost of funds average
Item Wed. yield 6-month CD (avg.) 4.23% Money fund (avg.) 4.37 1-year CD (avg.) 4.71 6-month T-bill 5.04 1-year T-bill 5.06 2-year T-note 5.52% 5-year T-note 5.65 10-year T-note 5.79 30-year T-bond 5.97
Source: Bloomberg News