The Federal Reserve boosted a key interest rate on Wednesday for the second time in three months — a move that will affect Southland consumers with credit card debt, adjustable-rate mortgages and home equity lines of credit.
The Fed’s move to hike its benchmark short-term interest rate by a quarter percentage point to a still-low range of 0.75 percent to 1 percent was not unexpected. But at least two additional rate hikes are forecast for this year. They speak to a strengthening economy that has seen steady job growth, a stabilized housing market and increased consumer confidence.
After the Fed’s announcement, major banks began announcing that they were raising their prime lending rate from 3.75 percent to 4 percent.
Tom Adams, owner of the Century 21 Adams & Barnes realty network in the San Gabriel Valley, said homeowners whose adjustable-rate mortgages aren’t due to reset anytime soon won’t see any change. But homeowners whose rates are about to tick up will be digging deeper into their wallets.
“If you have a $500,000 mortgage this will cost you $1,250 more a year,” he said. “And if you have a HELOC (home equity line of credit) for $100,000 you’ll pay $250 more a year. This might be a good time for people to get away from their adjustable-rate mortgage and get a fixed-rate mortgage with a good rate.”
Homeowners who can make the leap from an adjustable-rate loan to a fixed-rate loan should probably do so in the near future as interest rates will be rising in the coming months and years, he said.
“Even if you still have six years to go on an adjustable-rate loan you might not want to wait to make that change because a fixed-rate loan six or seven years from now could be considerably more than it is today,” Adams said. “We’re also starting to see people get off the fence and make the decision to buy a home now because they see higher interest rates in the not-so-distant future.”
Inland Empire economist John Husing acknowledged that the real estate market will feel an impact from the Fed’s latest rate hike. But Southern California’s housing market, he said, has already been blunted by a limited supply of homes.
“I spoke at three conferences last month and all of the Realtors were wildly excited about 2017,” he said. “But when you ask them what they’re going to sell they just look at you and say, ‘Something will happen.’ We have strong product demand but no product.”
Credit card debt is another factor to consider since most credit cards have a variable rate with a direct connection to the Fed’s benchmark rate. Wednesday’s quarter-percentage-point increase means consumers will pay an extra $25 a year for every $1,000 of debt, according to NerdWallet. So if someone has racked up $10,000 in credit card debt they’ll end up paying $250 more each year.
And those figures don’t take into account future rate hikes that are likely coming this year.
Personal finance website WalletHub noted in a recent report that credit card debt among Americans is “steadily worsening.” Wednesday’s announced rate hike, the company said, will cost U.S. consumers roughly $1.6 billion in extra credit card finance charges during 2017.
WalletHub’s Credit Card Debt study shows that U.S. consumers racked up $89.2 billion in credit card debt last year, pushing outstanding balances to $978.9 billion. That falls about $3 billion below the all-time record set in 2007, but WalletHub figures the nation is on track to surpass that by at least $100 billion this year.
Still, Husing said Southern California’s economy is looking good — particularly in the Inland Empire.
“Revised numbers from the EDD (state Employment Development Department) show that we added 47,500 jobs last year,” he said. “And the previous year was revised up to 60,000. We’re now up 109,000 jobs, or 8.3 percent above our pre-recession peak in 2007. California is up 6.7 percent and the nation is up 5 percent.”
Many economists think the next hike will occur no earlier than June, given that the Fed probably wants time to assess the likelihood that Congress will pass President Trump’s ambitious program of tax cuts, deregulation and increased spending on infrastructure.
The central bank’s outlook for the economy changed little, with officials expecting growth of 2.1 percent this year and next year before slipping to 1.9 percent in 2019. Those forecasts are far below the 4 percent growth that Trump has said he can produce with his economic program.
“It could be that the interest rate hikes are more about heading off Trump’s plan to cut taxes and increase spending in the middle of a full-employment economy,” said economist Christopher Thornberg, a founding partner with Beacon Economics in Los Angeles. “That could very well send us into another financial bubble.”
The Associated Press contributed to this report.