People with variable-interest-rate loans, such as credit-card balances or home-equity lines of credit, will see rates rise soonest, but eventually fixed interest rates on car loans and mortgages will also rise as people take out new loans.
The smart money — in fact, nearly all the betting money — is on the Federal Reserve lifting the benchmark interest rate off the floor Wednesday.
The expected move will come after years of anticipation and trepidation. Several times now, speculation of a hike set the stock market swooning and some experts howling about the effect on a still-wobbly economic recovery.
When it finally happens, as is expected at the Fed meeting Tuesday and Wednesday, the move could seem almost anticlimactic.
For one thing, the rate the Fed sets — for short-term lending between banks — doesn’t automatically change consumer or savings rates. But it sets a direction other rates generally follow.
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For another, “Nobody believes the Fed will move up rates very quickly,” said University of Georgia economist Jeff Humphreys.
The Fed rate has been near zero for years as part of a policy to goose the recovery, and this month’s initial increase is expected to lift it just a quarter-point. Another quarter-point bump might come next year, Fed-watchers say.
This is how the rate change will ripple through the economy:
Consumers account for almost one-fourth of the nation’s $59 trillion total debt load, according to the Federal Reserve. For many, higher interest rates means higher payments, which could crimp spending.
“Debtors are going to be the losers,” said Humphreys.
People with variable-interest-rate loans, such as credit-card balances or home-equity lines of credit, will see rates rise soonest, but eventually fixed-interest rates on car loans and mortgages will also rise as people take out new loans.
“The credit-card customer probably feels this more than anybody else,” said Chris Marinac, managing principal at FIG Partners, an Atlanta bank-advisory firm. Those borrowers’ rates — typically around 12 percent now — will rise almost in lock-step with the Fed’s moves, he said. Such “revolving” credit accounts for about 6 percent of household debt, according to Federal Reserve data.
The bright side, Humphreys said, is that many households have paid down debt since the Great Recession, and those with fixed-rate debt are paying historically low rates.
Total consumer debt across the nation remains below its 2008 peak of nearly $13.9 trillion. “We’re actually in pretty good shape to withstand these interest rate increases,” Humphreys said.
The stock market
With the benchmark rate so low for so long, the market has been the only growth game in town for many investors. Virtually each recent hint of the Federal Reserve raising rates has sent stocks into a swoon, followed by a rebound when the Fed backed away.
“There has been so much uncertainty and anticipation as to when the rate would go up and that uncertainty has been holding things back,” said investment adviser Emily Sanders, managing director of United Capital’s Atlanta office. She even thinks a hike this week will spark a “relief rally,” though she added: “I’m not saying a big rally.”
Plenty of factors, led by plunging oil prices, are driving market volatility right now. That could also mute the effect of a rate hike.
Some market-watchers also say the market won’t be moved as much by what the Fed does this week as by what it says about rate hikes in the future.
Mortgage rates aren’t directly pegged to the benchmark Fed rate. They ride along with the yield paid on 10-year Treasury notes. That note reacts to the stock market, inflation and the overall economy — all of which can be influenced by Fed-rate policy.
For noncash buyers, any significant change in interest rates affects affordability and can knock them out of price ranges or out of the market entirely.
A rate hike could actually be good news for housing if it pushes both buyers and sellers off the sidelines, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
“There’s a big body of fence-sitters who will come out to buy houses,” he said.
Banks are more sensitive to Fed moves than just about any other type of business. They make most of their money by collecting customers’ deposits and loaning that money out at higher interest rates.
Since the Great Recession, the interest-rate spread between banks’ loans and their deposits — their interest margins — have dropped to the lowest level in decades.
When the Fed raises rates, expect bank profits to get a boost, allowing them to lend money at higher rates.
Some banks will benefit more than others, said Marinac, the expert at FIG Partners. Big banks with large portfolios of business loans tied to variable interest rates will see profits rise faster than most small community banks that have more fixed-rate loans.
Companies small and large have to borrow to buy equipment, hire more employees, and keep the lights on and workers paid when there are gaps in cash flow. The higher its borrowing costs, the less money a company is likely to spend on growth — and the more likely it could run into trouble paying off debt.
When the Fed lifts the benchmark rate, the prime rate, the interest rate banks charge their most creditworthy customers generally rises as well, also affecting other loans pegged to the prime rate.
Big corporations can usually absorb small rate changes. Small companies without deep financing sources may have to turn to other options.
Often lost in the concern about spurring the economy have been those who depend on a steady rate of return and minimal risk. Such rates have been at painfully low levels. Savers’ returns on money market and CD accounts will likely begin rising — but slowly.
Interest rates on new federal student loans are tied to rates in the financial markets and are reset annually for new loans. So they’d likely rise, though not right away and not by much initially.
Higher debt costs could be a drag on the economy. Many economists say millennials’ heavy college debt has slowed their buying of homes, autos and other goods. These 20- and 30-somethings account for the bulk of the 43 million Americans with college debt averaging $27,000, according to the Federal Reserve.