How Fed interest rate hikes could affect homebuying and saving

Federal Reserve Chair Janet Yellen (left) and Vice Chairman Stanley Fischer listened to a presentation during a meeting of the Board of Governors of the Federal Reserve in Washington. Evan Vucci/AP

The Federal Open Market Committee, the Federal Reserve’s rate-setting body, opted not to raise interest rates at its meeting last week but suggested that it could still approve an increase when policy makers meet again in December. So what would that mean for consumers?

I’ve been hearing about a rate hike for a while. Why hasn’t it happened yet?

Over the summer, most economists expected the Fed to raise its benchmark interest rate, which has been near zero since 2008, at its September meeting. But after a spate of negative economic news from China, Europe, and Japan sent global markets tumbling, the Fed decided to hold off. Last week, policy makers again agreed to delay a rate increase.

But that doesn’t mean one isn’t coming. Chairwoman Janet Yellen, in a speech at the University of Massachusetts Amherst in September, said most members of the Federal Open Market Committee support “an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

Yellen cautioned that economic “surprises” could change the calculus, and weaker-than-expected job growth in August and September has led many investors to bet that the Fed won’t raise rates until 2016. Futures contracts monitored by the CME Group of Chicago suggest a 47 percent chance the Fed will act before the end of the year, up from 37 percent before the Fed’s last meeting.

More than 60 percent of economists, however, said in a recent Wall Street Journal survey that they believed the Fed would raise rates in December. In the statement following last week’s meeting, the Fed said it could raise rates in December if it sees “some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

Would the Fed’s rate increase make it harder to buy a home? Should I buy now?

“Real estate agents will say the best time to buy is always now,” joked Aaron Jackson, an economics professor at Bentley University in Waltham. But Jackson and other analysts say there’s no reason to rush.

Yellen and other Fed officials have signaled that when they raise rates, they will do so gradually — off historically low levels. Long-term loans like mortgages are not tied directly to the Fed’s benchmark, although they are influenced by it.

Mortgages are tied more to 10-year Treasury rates, which respond to other factors besides the Fed. For example, global turmoil can send foreign investors seeking to pour money into Treasuries, which raises the price but pushes rates down. Mortgage rates have fallen over the past several weeks, slipping to 3.76 percent last week for a 30-year loan, according to Freddie Mac, the government-owned mortgage company.

Analysts say that increases in borrowing costs as the economy improves will probably be small. A quarter-point increase on a 30-year fixed-rate mortgage for $250,000 means another $40 in payments every month, said Danielle Hale, a managing director at the National Association of Realtors.

Greg McBride, an analyst at Bankrate.com, a consumer financial website, said the stock market might swing up and down on the day the central bank makes its decision, but when the dust settles, consumer credit rates, such as mortgages, are unlikely to change very much.

“That idea of just rushing to buy a house now before mortgage rates go up, the danger there is you leap before you’re really ready,” McBride said. “It’s like getting married because there’s a sale at the bridal shop.”

What about home equity lines of credit?

Home equity lines of credit are popular for financing home renovations. Their costs are usually tied to the prime rate, technically the rate banks charge their best commercial customers. The prime rate, now 3.25 percent, is tied directly to the federal funds rate; when the Fed rate climbs a quarter-point, so does the prime.

The rates on home equity lines of credit float, so if the Fed boosts its benchmark rate, banks are likely to follow suit on prime and home equity lines of credit. Again, the Fed has signaled that when it begins boosting rates, it expects to raise them slowly.

Is it a good idea to put savings into a certificate of deposit, or CD? Should I reshuffle my portfolio?

CD rates remain near historic lows, with the average one-year return on a certificate of deposit around 0.3 percent in the Boston market, according to Bankrate.com. A slight increase in the Fed’s rate is unlikely to raise yields much, McBride said, so it would be unwise to purchase a longer-term CD because it could lock savers into a long period of lower-than-inflation returns.

Chris Chen, a Waltham financial planner, said low interest rates have led many investors to abandon savings instruments and income-generating bonds in favor of riskier investments like stocks. A bump in the Fed’s target rate could make saving instruments slightly more attractive, but he said he doesn’t expect a sudden turnaround.

“I don’t think there will be a mad rush to take money out of mattresses,” Chen said. “It will probably take a few more hikes” before he counsels his clients to reevaluate their investment strategy.