The Federal Open Market Committee meets Wednesday.
Nothing is expected to happen, no change in short-term interest rates. But it may be the last meeting that nothing happens. Something is more likely to occur during the next FOMC meeting in September.
The last time the monetary policy body hiked short-term interest rates was in June 2006.
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So please excuse me if I am feeling rusty about writing of rising interest rates. Many business journalists probably feel the same way. And if they do, then many consumers, savers and investors also likely need to be reminded about what happens when interest rates rise and what they should do.
Fortunately, some people remember. Greg McBride, Bankrate.com’s chief financial analyst, is one of them.
“The economy is not hitting the cover off the ball,” but it has strengthened to the point that it no longer needs to rely on zero and near-zero interest rates, McBride said.
The first interest-rate hike, consumers should realize, will be inconsequential by itself, McBride said.
“But the winds would have changed directions, and the cumulative effect of rate hikes over a couple of years could be significant” for consumers, he said.
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Homeowners with adjustable rate mortgages will be hit the hardest initially. Those households could see monthly payments rise by a couple of hundred dollars a month.
Home-equity loans will become more expensive, too, McBride said. After a series of rate hikes, paying off credit card debts will be more costly.
McBride said people with adjustable rate mortgages should refinance now into a fixed-rate mortgage to insulate themselves from higher monthly payments.
People who pay interest on credit card debts should seek out low interest-rate credit card offers now because those offers tend to disappear when interest rates rise.
In general, consumers should accelerate debt repayments now rather than wait to repay them “in the headwinds of rising interest rates,” McBride said.
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Savers who rely on interest-rate income from money market funds, certificates of deposit and other similar financial products won’t get a break soon, McBride observed.
Financial institutions won’t raise their currently dismal interest rates for deposits just because the FOMC hikes the rate for fed funds, the rate for short-term deposits between banks.
Savers must watch for inflation, now below 1.5 percent a year, to rise to near 2 percent before the FOMC and financial institutions raise rates in a way that will help savers. That won’t happen anytime soon, especially with energy prices retreating again.
McBride’s advice for savers is to shop around for the best rates once interest rates begin rising. “It’s going to take several rate hikes to see a difference,” he said.
Investors can expect stock price volatility when the first interest-rate hike is announced.
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“That’s par for the course,” McBride said from his office in Palm Beach Garden, Florida. “Investors instead should look at the big picture. Interest rates are going up because the economy is getting better. That’s good for corporate earnings and for stock prices. They should resist a knee-jerk reaction” to volatility.
McBride noted that past series of interest-rate hikes lasting several years ended badly. In 2000, rising interest rates exposed and popped the technology bubble. It happened again in 2008 for the real estate bubble.
But the first interest-rate jumps likely to occur this year will not threaten the yield curve, the difference between short-term and 30-year interest rates.
Only when the economy begins to slow will the yield curve begin to flatten, he said, signaling the next recession.
That’s when the mettle of the monetary policy makers, the FOMC members, will be tested. As they meet Wednesday, they’ll know that test will come eventually, even before they raise interest rates the first time.
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dhendricks@express-news.net