Fed Speeds Up Tapering – How it Affects You and What You Should Do Next

Blog posted On December 21, 2021

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Last week, the Federal Reserve announced that it would be doubling down on its asset tapering process. Previously, it was reducing its bond purchases by $15 billion a month, setting its projected completion date for June 2022. In light of recent inflation spikes, the Fed decided to speed up its tapering process and remove $30 billion in bond purchases per month. The new plan now puts the Fed’s projected completion date for tapering in March. What does this mean for you?

Low rates might start rising sooner

The sooner the Fed completes its asset tapering process, the sooner it will start raising the benchmark interest rate. Though the benchmark interest rate does not directly set mortgage rates, it can affect them. Typically, when the benchmark interest rate is lower, mortgage rates are lower. When the benchmark rate is higher increases, mortgage rates are likely to be higher as well. With the projected tapering completion set for March 2022, many experts believe the Fed will start raising the benchmark rate soon after. Right now, the Fed has three rate hikes penciled in for 2022. Fed officials predict that the federal funds rate will climb to 0.9% by the end of next year, 1.6% by the end of 2023 and 2.1% by the end of 2024.

Fixed-rate mortgages could be a smart financial move

If you haven’t locked in your mortgage rate for your purchase or refinance, now might be the time to do it. If you have an adjustable-rate mortgage, you might consider refinancing to a fixed-rate mortgage. Adjustable-rate mortgages will rise and fall with the market rates, so if market rates start rising, your mortgage could start costing more. By locking in a fixed-rate mortgage, you can keep the current mortgage rate throughout your loan, regardless of what happens with the market rates.

Experts suggest paying off credit card bills as soon as possible

The annual percentage rate (APR) on credit cards is closely linked to the benchmark interest rate set by the Fed. Most credit card issuers calculate their APR by looking at the U.S. prime rate – which is determined by several different factors including the federal funds rate. Therefore, when the Fed increases the federal funds rate, your credit card APR will likely increase. “Credit cards are among the most influenced by the Fed because so many credit card interest rates are based on the prime rate,” said Matt Schulz, chief credit analyst at LendingTree. “If you have credit-card debt now, it would probably be a good idea to assume that your rates are going to go up in the not-too-distant future. If you can put a little more to credit card debt to knock it down, the better off you are.” Credit card interest rates are typically much higher than mortgage rates or interest on other loans. Consequently, when they have any increases, it could end up costing you much more than increases on other loans.

Paying off your credit card balance might seem more difficult for some people. If you are wondering how you can make extra payments without an increase in salary, one good way is by getting a cash-out refinance. With a cash-out refinance, you can exchange some of your home’s equity for money and use that money to consolidate debt. If you would like to learn more about our cash-out refinance options, let us know.

Sources: MarketWatch