7 benefits of a Federal Reserve interest rate hike

Federal Reserve Chairman Jerome Powell speaks at a news conference following the Federal Open Market Committee meetings in Washington, U.S., March 21, 2018.

Interest rates are going up. The Federal Reserve hiked rates once already this year in March. And at its meeting this Tuesday and Wednesday, the Fed is likely to raise the federal funds rate again. Many experts predict there will be a third rate hike before the end of the year.

Sure, the increases mean it will cost more to borrow. But you’ll benefit from getting better rates on high-yield certificates of deposit.

Healthier returns on CDs are only one gain from the Fed’s rate-raising campaign. Here’s how you can take advantage of other positive outcomes from Fed rate increases.

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1. Higher returns for savers

If you’re a saver, low interest rates have brought about the financial equivalent of a long drought. Any improvement, even modest, is welcome and overdue.

“Rising interest rates would benefit elderly Americans on fixed incomes and others who rely on interest income to help cover their living expenses,” says Alan MacEachin, corporate economist with Navy Federal Credit Union.

2. Tamed inflation

Most broad-based measures of prices indicate inflation has continued to remain under control in the U.S. in recent years. The central bank’s target for inflation is 2 percent, but inflation has yet to hit the bull’s-eye on a sustained basis, as measured by personal consumption expenditures, or PCE.

If the Fed achieves its objectives in steering the economy, inflation should remain under control.

A positive inflation scenario after a rate increase might include “lower prices of imported consumer goods, due to a likely higher exchange value of the dollar if our domestic rate increases are not matched by policy tightening in other major economies,” says Daniil Manaenkov, U.S. forecasting specialist at the Research Seminar in Quantitative Economics at the University of Michigan.

3. More lending

A credit bubble rightfully received some of the blame for the financial crisis in 2007. In the aftermath, lending came to a complete stop.

Lending has resumed. “Banks may have a greater incentive to loan out reserves at higher interest rates, and the increased flow of additional credit would boost economic growth,” says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.

4. More interest income for retirees

As a rate boost brings better returns to savings vehicles, senior citizens should enjoy better paydays by putting their money in CDs and savings accounts. “Higher interest rates on CDs and other financial instruments will particularly help older Americans trying to live on their retirement savings,” says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.

As the population ages in coming years, many more Americans will come to appreciate even modest increases in interest income during retirement when they buy certificates of deposit.

5. Stronger dollar to boost purchasing power

As the Fed continues to boost rates (and with the outlook for more rate hikes to come), the U.S. dollar gets more support. Ultimately, that means more purchasing power with the greenback compared with other currencies.

Predicting moves in the foreign exchange market is difficult, but Snaith and other economists say the dollar could strengthen further as the Fed boosts rates.

Fed tightening “is likely to mean a somewhat higher dollar, so people traveling to Europe will do well,” says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

6. Stocks will trade on fundamentals

As the Federal Reserve embarks on what officials have called “normalization” (that is, a backing away from record-low rates), stock prices may start to make more sense and not reflect the central bank’s easy monetary policy quite so much.

“A normalization of rates would return the focus to market fundamentals and off of focusing on the nuances of each Fed statement,” says David Nice, former senior economist at DS Economics in Chicago.

7. Would-be homebuyers may get off the fence

As the Fed continues to raise rates, higher mortgage rates likely will follow. If the prospect of higher mortgage rates compels you to a home sooner than later, you won’t be alone.

“Higher mortgage rates could push buyers off the fence — increasing demand, increasing prices and increasing home equity so that more people can sell their homes,” says Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

source: https://www.cnbc.com/2018/06/11/7-benefits-of-a-federal-reserve-interest-rate-hike.html

The Housing Crisis Is Officially Over

happy family mother and daughter playing at home in a tent.
The financial crisis was a decade ago, and many Americans have recovered. At the peak of the economic downturn, more than 30 percent of American homeowners owed lenders more than the value of their homes. Now, that number has finally dropped to under 10 percent.

However, millions are still reeling from aftershocks of the housing crisis: Nearly 4.5 million homeowners are underwater on their mortgages, according to a new report from Zillow.

Click to read more about which states are still being hit hard by the foreclosure crisis.

In the late 2000s, the housing bubble burst sent home values into a freefall, with the typical U.S. home losing more than a quarter of its value when the market crashed, sending millions of homeowners into negative equity.

Know: 19 Reasons Your Mortgage Loan Could Get Rejected

The situation is improving, but the outlook can appear bleak for Americans with underwater mortgages. Relief can be found with some options that exist for homeowners to avoid foreclosure:

  • Stay and pay: Don’t continue to throw money at a bad investment, but if the sense of obligation pulls you, you can continue to pay your mortgage bill month after month in the hope that your situation improves.
  • Consider a short sale: The goal is to get out of your home quickly and for the bank to forgive remaining debt. Homeowners should be prepared to sell their houses for a lower price than they paid for it.
  • Walk away: Only pull this strategic default card if you’re prepared for the consequences of a drop in credit score, a credit report blemish and guaranteed difficulty in securing a future loan.
  • Refinance your home: A lower interest rate and lower monthly payment through refinancing your mortgage might give you the relief you need in the short and long term.
  • Get a deed in lieu of foreclosure: This allows you to give the house to the lender and avoid foreclosure proceedings altogether. Chief among the benefits is that you are immediately released from most or all indebtedness associated with the defaulted loan and your credit suffers less.
  • Get a reverse mortgage: Available to individuals ages 62 and older, eligible homeowners can access a portion of their home equity by borrowing against it. Seniors can take the money in a lump sum, receive monthly payments, draw on it like a line of credit or use any combination of the three. The homeowner’s obligation to repay the loan is deferred until the homeowner dies or the home is sold.
  • Home loan modification: With a loan modification, lenders lower the interest rate and payment, either temporarily or permanently. It is also fairly common for lenders to extend the term of the loan or to allow borrowers to make up missed payments by tacking them on to the end of the loan or spreading them out over the remaining loan.

Read: Pros and Cons of Getting a Deed in Lieu of Foreclosure

The best option to avoid foreclosure is to stay ahead of your bills, if possible. Research government mortgage assistance agencies like Home Affordable Refinance Program (HARP), Hardest Hit Fund (HHF) and Department of Housing and Urban Development (HUD) for free guidance on how to prevent a foreclosure.

source: https://finance.yahoo.com/news/housing-crisis-officially-over-182836139.html

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