How Banks Reacted to the Fed’s Interest Rate Hike

December 16, 2015, 9:29 PM UTC
Photograph by Getty Images

It’s official: Borrowing rates are going up.

Following the Federal Reserve’s move to raise interest rates for the first time in nine years, a number of banks said they would raise their so-called prime rate, which had been at 3.25% since 2008. Wells Fargo (WFC), Bank of America (BAC), U.S. Bank (USB), and JPMorgan (JPM) all said that they would raise the rate to 3.5%. Other banks are expected to follow.

The prime rate is what banks charge their most creditworthy customers, including large corporations. Credit cards and some small business loans are tied to the prime rate.

During the Fed’s press conference, Chair Janet Yellen said it was unlikely that the Fed’s interest rate move would increase other consumer borrowing rates, like mortgages or auto loans. She said those are tied to longer-term interest rates, which are unlikely to move. Meanwhile, variable rate loans, like home equity lines of credit, are likely to rise.

Depositors will have to wait. No bank reported a corresponding increase in deposit rates following the Fed’s move. Investors had predicted that it would be a little while until banks end up raising what they pay savers. That could be good for their bottom lines. Shares of banks were up on the news of the rate hike. JPMorgan stock, for instance, was up 2% to $67 on Wednesday. Shares of Wells Fargo were up 1.7% to $55.85.

At the press conference, Yellen got a question about whether she thought banks would be able to swallow higher interest rates and keep lending. “Lenders are more resilient now compared with before the financial crisis,” Yellen responded.

Greg McBride of Bankrate estimates that the cumulative effect of interest rate hikes over the next couple of years would take rates on adjustable rate mortgages to 5% from a recent 3%. Home equity lines of credit could rise to 6%, from a recent 4%. And the average credit card lending rate could reach 17%, from 15%.

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