Consumers and businesses will eventually feel the impact of the Federal Reserve's announcement that it will begin increasing its benchmark interest rate in March - and likely a few additional times this year.
Inflation is way above the Fed's 2% target, and the job market is back to normal, so it's time to raise rates.
After the worldwide recession erupted two years ago, the Fed had cut its key rate. It was supposed to boost the economy by getting people to borrow and spend.
The Federal Reserve hopes to alleviate consumers' and businesses' strain by gradually making loans more expensive.
Here are some questions about what this means for consumers and businesses.
WOULD MORTGAGE RATES GO STEADY UP IF I WANT TO BUY A HOUSE?
Most likely, but it is difficult to predict. In general, mortgage rates do not rise simultaneously with Fed rate increases. In some instances, they even move in the opposite direction.
The rate on long-term mortgages is usually determined by the rate on the 10-year Treasury, which, in turn, is influenced by many factors. Among them are the expectations of investors regarding future inflation and global demand for U.S. bonds.
Whenever inflation is expected to remain high, investors tend to sell Treasury bonds because their yields provide little or no return once inflation has been taken into account.
DOES THIS MEAN HOME-LOAN RATES WON’T RISE MUCH ANYTIME SOON?
Certainly not. Currently, inflation is exceeding the Federal Reserve's target of 2 percent. So fewer people are buying Treasurys. And if the Fed keeps raising rates, the 10-year note rate could rise over time - and mortgage rates, too.
It's just hard to tell when.
In contrast, even when Treasury yields are low relative to inflation like they are now, investors still flock to them like they are now. That's especially true when the global economy is in turmoil.
HOW ABOUT OTHER KINDS OF LOANS?
Variable-interest debt like credit cards, home equity lines of credit, and other types of debt would see their rates rise by roughly the same amount as the Fed hike. The reason is that those rates are derived in part from the prime rate of banks, which moves in tandem with the Federal Reserve.
Those who do not qualify for such low-interest credit card offers may have to pay higher interest rates because the rates for their cards would rise at the same rate as the prime rate.
Auto loan rates will not necessarily rise as a result of Fed rate hikes. In general, car loans are more sensitive to competition, which lowers the rate of increase.