Rising Federal Interest Rates Means Rising Short-Term Lending

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The Federal Reserve raised interest rates this month for the first time since June 2006.

Rates were raised from 3.25% to 3.50%.

The Federal Reserve has two mandates: to keep inflation under control and to ensure that the economy operates at a level that allows the United States to have solid employment.

With this increase, consumers will see an increase in short-term loans, but probably not immediately in their mortgage rates, according to Trustmark Bank CEO Gerard Host.

Host is also the head of the Federal Reserve in Atlanta. He noted that his views do not represent those of the Federal Reserve.

“The Fed increase is really more effective on short-term interest rates than on longer-term interest rates,” he said.

Consumers with short-term loans, such as auto loans, could see an immediate boost.

“The quarter percent increase will slightly increase these types of loans,” Host said.

Businesses could also be impacted on their credit lines, he said. Those with a home equity line of credit will also be affected.

“The prime rate went from 3.25 to 3.5, which is tied to a lot of business loans, and it’s tied to a lot of home equity lines of credit,” Host said. “If the prime rate goes up and if they have a variable rate loan tied to the prime rate, the rate will go up.”

Mortgages, however, have yet to be hit, but Host said Trustmark has seen a “uptick” in mortgages.

“The reality is that mortgage rates haven’t changed at all,” he said. “Even though mortgage rates haven’t gone up, it seems like people are moving faster to close their mortgages or to get a mortgage.”

Lynette Praytor, Crye-Leike Regional Broker for Mississippi, said realtors were preparing for a rate increase in 2016, but the real estate market has yet to be impacted by that increase.

“We expect rates to rise next year, but I don’t think the immediate impact of the Fed raising rates will affect the bond,” Praytor said.

She added: “We never thought we would see rates this low, but we have them right now. The best information available right now is that if you want to buy, now is a good time to buy. “

According to Brooks Mosley, president of Security Ballew in Jackson, consumers are unlikely to see a significant short-term return on their CDs (certificates of deposit) or cash in the bank.

“It’s going to take a while before the consumer sees a significant increase in revenue on your typical CD or money in the bank,” Mosley said. “The spread on what they lend their money to has been so narrow…the interest paid to the consumer is very unlikely to increase anytime soon.”

However, consumers with ratings will be negatively affected, Mosley said.

“People with notes, with a variable rate, they’re going to see their interest rate go up,” he said.

Rates are expected to rise by a quarter point each quarter in 2016. Host said the current increase will not have a significant effect on “everyday” banking.

“In terms of day-to-day operations, the quarter-point change in the increase will not have a material impact on Trustmark’s bank operations,” Host said. “It’s more impactful if interest rates continue to rise rapidly over a short period of time.”

Contact Sarah Fowler at sfowler@gannett.com or (601) 961-7303. Follow @FowlerSarah on Twitter.

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