How Will Consumers Really Be Affected When Rates Start Rising?

The Fed will be meeting again in September, and, once again, the jury is still very much undecided about what that body will do with interest rates. Many experts say that the Fed will finally make at least a modest move upward, while others are convinced that the persistent weakness in both the domestic and global economies will prompt the Fed to kick the can down the road at least one more time. I will admit to being precisely 50/50 on the issue – clearly, a compelling case can be made for both sides. This said, interest rates are going to be headed up in the near term; it may not happen this time, but it will be happening relatively soon. Given that, what should you know in anticipation of the first interest rate hike in a long time?

In order to answer this question, you have to put the prospective ascension of rates in the proper context. They are currently at all-time lows. They’ve been at all-time lows for a while, and have remained there while the economy has exhibited what might be considered unprecedented weakness in the truly modern era. It is precisely this weakness that has left Fed Chair Janet Yellen and the rest of the Fed crew so gun-shy about tampering with rates up until now. Although the U.S. economy has shown some modest signs of improvement since the onset of the 2008 global meltdown, there is still a great deal of lethargy in a variety of areas, most notably that of employment. More troubling than unemployment numbers are the underemployment figures that have telegraphed to economists a distinct vulnerability on the basis of a new underclass of employees who represent America’s part-time workers. Globally, there are all kinds of problems, including the now-persistent upheaval in China’s markets, as well as continually-sinking oil prices. The bottom line is that no one has to look very far to see that the Fed’s inclination to raise rates remains challenged by a great number of economic factors that suggest whatever real growth the economy is seeing presently, it is hardly a sure thing, going forward.

So…what does this mean to the average consumer? Let’s get back to the matter of rates sitting at all-time lows. When rates finally are initially boosted upwards, the expectation is that it will be by no more than a quarter of a point. This means that for the biggest ticket items, like homes and cars, affordability will remain very much in place. The key for the consumer is in recognizing the difference between the mere fact that rates are “moving up,” in the general sense, and the level at which they are actually sitting. Interest rates that begin with the numeral “4” remain an excellent opportunity for consumers to utilize debt to make home purchases, as well as buys of other, expensive goods.

There’s a theory out there that a slight bump in rates might actually help home sales this time. That may seem counterintuitive, but here’s the reasoning: prospective buyers who have been taking their time in this environment of extremely low rates will receive their first indication, should a Fed bump occur, that rates over the long haul will be moving appreciably higher; however, initial increases in the near term will be small enough such that mortgage rates will remain very low. According to some experts, the combination of these two influences are expected to prompt a flurry of activity on the part of buyers who realize that rate levels may become a problem for them down the road, and don’t want to see themselves priced out of a new home that way.

Higher rates are coming. We may not see them in September, but they are coming soon to a bank near you. Know that now, but don’t panic. Rather, look at the prospect of higher rates here shortly as your cue to begin revisiting your financial profile, with an eye to making moves on behalf of those significant, rate-sensitive purchases you’ve been considering for some time.

The information contained here is for general information purposes only. The Financial Writer blog and Bob Yetman disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented herein. Nothing contained in this article, or any other article featured at this blog, should be construed as a solicitation or recommendation to engage in any financial transaction. You should seek the advice of a qualified professional before making any changes to your personal financial profile.

 

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