US Federal Reserve raises interest rates – here's what it means for you


The U.S. Federal Reserve raised interest rates by 0.25 percent – the first time the rates have gone up since 2006, before the financial crisis.

The rate has been at near zero (0-0.25 percent) since 2008, but on Wednesday the Fed announced that it will rise to 0.25-0.5 percent following a "considerable improvement in labor market conditions this year," and said it is "reasonably confident" that inflation will rise in the medium term to its 2 percent target.

The New York Times says the move from the Fed is "a vote of confidence in the strength of the American economy at a time when much of the rest of the global economy is struggling."

U.S. unemployment has halved since the downturn, and the Fed also on Wednesday increased its predictions for the growth of the U.S. economy in 2016 from 2.3 to 2.4 percent.

The NYT has a useful explainer on what happens when interest rates rise, which you can read here.

So what will that mean for consumers?

Interest rates – the rates financial institutions charge for money they lend to each other – have been kept low since the crisis to allow cheap money to flood the country, encouraging consumers to borrow in order to stimulate the economy.

According to Fortune, the impact on consumers depends on how banks respond.

Banks will have to decide whether this 0.25 percent increase will prompt them to raise the amount they give to savers for their deposits, or the amount they charge borrowers for loans, credit and mortgages.

Those with fixed-rate loans won't be affected, but

">Forbes has some advice for anyone with variable-rate student loans or mortgages, and credit card holders.

Either way, any increase in borrowing costs is unlikely to be large given the small rate hike, with the New York Times saying the Fed's cautious approach means loans and mortgage rates are "likely to remain low by historical standards for years to come."

Economist Doug Duncan told USA Today he expects 30-year mortgage rates to rise from the current 3.9 percent average to 4.1 percent over the next year, which would increase the monthly cost of a $225,000 mortgage only by $26.

What are the risks?

Fortune points out that interest rates are usually hiked to counteract rising inflation, with banks then restricting the amount of money available in the economy (and thus slowing down increases in the price of goods and services) by charging higher amounts for borrowing.

But in this instance, inflation was only at 0.5 percent at the end of November – well below the Fed's 2 percent target.

The magazine reports some are suggesting the hike could undermine the recovery from the financial crisis and send the country back into recession, given it's also coming at a time when oil prices have plummeted and the Chinese and wider global economy is struggling.

The Washington Post reports this is why the Fed is pledging to "wean the nation off" its economic stimulus gradually, with low increases in interest rates.

It is likely to prove more costly for anyone planning to refinance their mortgage over the next few years (i.e. to pay for home improvements or to reduce the length of the mortgage), who will get a higher interest rate as a result, CNBC reports.

And anyone who has money invested in emerging markets could be hit by the rate hike as the U.S. dollar is likely to strengthen on the back of this move, which will in turn make certain countries whose companies have borrowed heavily in dollars in recent years vulnerable.

CNN Money reports that Brazil, Turkey and South Africa could be among the worst hit, having taken advantage of cheap dollars while the currency was weaker.

Marketwatch meanwhile says now is a good time for people to revisit their retirement accounts, and has some tips for changes that could be made.

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