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What the Fed’s rate hike means to consumers

The Federal Open Market Committee, the Federal Reserve’s policy making body, increased the central bank’s benchmark short-term rate by a quarter point on Wednesday. So what does that mean for consumers?

I’ve heard about a rate hike for a while. Why did it take so long?

Most economists and investors expected the Fed, which had kept its benchmarket rate near zero since 2008, to move sooner. Over the summer, the betting was September. But the central bank held off after a spate of negative economic news from China, Europe, and Japan sent global markets tumbling. Weaker than expected job growth in September kept the Fed on hold at its policy meeting at the end of October.

But policy makers clearly were looking for an opportunity to begin rasing rates and return the economy to a normal footing after the extraordinary measures the Fed took to support the economy during the financial crisis, deep recession, and weak recovery. In September, Fed Chair Janet Yellen, in a speech at the University of Massachusetts Amherst, said most policy makers expected to raise rates before the end of the year. Strong job growth in October and November --about 500,000 new jobs -- allowed Yellen to stick to the plan.

Will the Fed’s increase make it harder to buy a home?

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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 prompt foreign investors seeking safety to pour money into US Treasuries, which raises the price but pushes rates down.

Mortgage rates have moved higher in recent weeks as investors prepared for a Fed tightening. The average rate on a 30-year-fixed mortgage was just under 4 percent last week, up about a quarter point from early October, according to Freddie Mac, the government-owned mortgage company.

Economists at Freddie Mac forecast that average rate for the 30-year loan will rise gradually over the next year, reaching 4.6 percent by the end of 2016. A quarter-point increase on a 30-year fixed-rate mortgage for $250,000 means another $40 in payments every month, according to the National Association of Realtors.

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Consumers should not rush to buy a house just to get a slightly lower mortgage rate, said Greg McBride, an analyst at Bankrate.com, a consumer financial website. “It’s like getting married because there’s a sale at the bridal shop,” McBride said.

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, in turn, is tied to the Fed’s benchmark. Banks will likely follow the Fed and boost the prime rate a quarter point, to 3.5 percent from 3.25 percent, where it has been since the end of 2008.

The rates on home equity lines of credit float, so as the Fed raise rates, the costs of home equity lines will rise, too. Again, the Fed has signaled that it expects to raise rates slowly. Most analysts expect the Fed’s benchmark to rise to just over 1 percent at the end of next year.

Is it time to put my savings back into a certificate deposit, or CD?

Even with Wednesday’s rate increase, CD and other bank savings rates will remain near historic lows. The the average one-year return on a certificate of deposit is just over a quarter percent, according to Bankrate.com. The Fed’s move isn’t going to increase that much.

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Low interest rates have hurt the profits that banks earn from lending, analysts said. So, as rates rise, banks are likely to try to boost their profit margins by holding down the interest they pay on deposits, even as they increase what they charge for loans. In addition, banks are awash in deposits, and, for the time being, don’t need to offer higher savings rates to attract more.

As a result, analysts said, don’t buy CDs with terms longer than a year. The extra interest you might earn isn’t really worth tying up your money for 18 months, two years, or longer.