Federal Reserve Jacks Up Rates, As Per Usual

The Federal Reserve’s 16th consecutive interest rate hike yesterday means therate for a wide range of consumer loans has officially doubled in just two years.

Reuters reports that the Fed raised its target for the federal funds rate to 5 percent yesterday, meaning that most banks will begin boosting the prime rate they charge their best customers to 8 percent, up from 7.75 percent. The prime rate has risen from 4 percent in June 2004, and is at its highest level since April 2001.

Most lenders use the federal funds rate as a benchmark for rates on credit cards, home loans and other consumer lending, though competition does keep lenders from passing on every increase to consumers. Still, Florida home loan hikes are likely to be evidenced when the nation’s lenders release their averages tomorrow.

“Each rate hike means borrowers have to pedal into a stiffer wind to repay their variable-rate debts,” said Greg McBride, senior financial analyst at Bankrate.com. “But rates are not burdensome, which is why you haven’t seen consumers pull back on spending to any large extent.”

For reference, the prime rate peaked at 21.5 percent in December 1980. As for what lies ahead, McBride said borrowers will feel the pinch of the latest increase in higher rates for adjustable-rate mortgages, home equity lines of credit, credit card debt and student loans. Since June 2004, the Fed funds rate has risen to 5 percent from just 1 percent.

Further increases are possible, too. In a statement, the Fed said that the recent strong economic growth in the U.S. is likely to moderate, and that it may pause before raising rates again, however, “some further policy firming may yet be needed to address inflation risks.”

Wednesday’s increase was the second under new Chairman Ben Bernanke, who replaced the iconic Alan Greenspan three months ago. All news is not bad on the rate front. While increases hurt borrowers, they help savers — the average 7-day yield is 4.26 percent on taxable money market mutual funds and 2.98 percent on tax-free funds, up from a respective 0.59 percent and 0.52 percent in June 2004, said iMoneyNet, Inc. of Westborough, Mass.

“For savers, it’s great news,” McBride said. “That additional interest income is going a long way to offset higher costs we see from gasoline, energy and health care.”

Stay tuned for the release of the latest weekly report of Florida home loan rates, which are usually made available on Thursday or Friday.