Last week, the Federal Reserve Bank raised its interest rate by a quarter point (from 0.5 percent to 0.75 percent). The Fed also announced that it expects three more rate hikes in 2017, citing a strong U.S. economy and an expected higher inflation as reasons for the increases.
The last time the Fed raised the interest rate was in December of 2015, when it bumped it up the rate from nearly zero – a record low and a remnant of the 2008 financial crisis.
This rate hike should not have much of an immediate impact on student loans. It will most likely mean higher rates on financial products such as credit cards, home equity loans, and adjustable-rate mortgages. These loans follow benchmarks like banks’ prime rates, which generally follow the rate set by the Federal Reserve. These increases should only be modest, at least in the short term.
Greg McBride, financial analyst, explained, “This single quarter-point move in interest rates will go largely unnoticed at the household level, but coupled with last year’s hike, the cumulative effect could mount quickly if the Fed quickens the pace of rate hikes in 2017.”
As expected, several banks announced a quarter-point increase in their prime rate (from 3.50 percent to 3.75 percent).
The increase is an indication that the Fed thinks the economy is strong enough to hold up to a higher rate. The vote to increase the rate was unanimous (10-0). The Fed’s three forecasted increases for 2017 are up from the two it forecasted last quarter, another indication of a strong economic outlook.
James Marple, an economist at TDBank, commented that the increase is, “a signal that the Fed has become more confident in the economic outlook and that inflation will increasingly track closer to the 2 percent target.” Indeed, forecasts released by the Fed indicate a stronger economy and lower unemployment.
That said, the forecast of three rate hikes in 2017 is certainly subject to change. For example, at this time last year, the Fed predicted four rate hikes for 2016. There has only been one (the most recent one last week) this year.
In a news conference after the announcement, Janet Yellen commented on President-elect Donald Trump’s proposed economic policy. Citing a “cloud of uncertainty,” she indicated that the Fed was unable to reach any conclusions about Trump’s proposed plans and the effects it has already had on stock prices and mortgage rates.
Yellen did comment on Trump’s proposed tax cuts and infrastructure spending, stating that she did not think that level of stimulus was necessary given the current state of the economy. Yellen acknowledged that she and her predecessor, Ben Bernanke, had supported economic stimulus in the past, but said that the economy was at a much different place at that time.
How does all this factor into the student loan equation? Well, speculation is required here. If the economy improves further as unemployment decreases, the labor field will be much more welcoming to new graduates exiting college. Since many of these graduates are student loan debtors, the Department of Education may be inclined to increase interest rates in accordance with the improved labor market and ability to repay student loans.