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What Do Fed Rate Hikes Mean to Me?

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The Federal Reserve bumped up interest rates another 25 basis points this week. The target federal funds rate now stands at 1.75%.

“Well, OK,” you might be thinking. “But this is just a bunch of wonkish policy stuff. What’s it to me?”

In a nutshell, it means your debt is going to cost you more. And that’s not good in an America where household debt has spiraled to record levels.

As a Reuters report put it, Fed rate hikes extend beyond corporate America to household budgets.

In the first place, your credit card bill will likely tick up within the next few billing cycles as your interest rate nudges higher.

Americans have amassed record high levels of credit card debt. Revolving debt grew by $26 billion in the fourth quarter of 2017 alone, a 3.2% increase. Americans have run up an $834 billion credit card tab. Meanwhile, flows into serious delinquency have increased steadily since the third quarter of 2016. Even a small uptick in interest rates means millions of dollars in extra interest expense.

According to Federal Reserve date reported by Reuters, the rate hike on Wednesday will add $12.50 a year in interest to a credit card with a balance of $5,000 and an interest rate of 14.99%, the average in the fourth quarter of 2017. That doesn’t sound like a whole lot, but consider the Fed is talking another two hikes this year. That brings the total cost increase to $37.50. That still doesn’t sound like a lot. But multiply that amount by millions of Americans with credit card balances and suddenly you’re talking about a whole lot of money flowing out of consumer’s pockets. All of that money going to credit card companies is money that can’t go to the local retailer.

You also have to consider the cumulative effect.  Approximately $62.50 a year has already been added to credit card payments since December 2015 as a result of the Fed’s previous five rate hikes. If the Fed follows through with two more hikes, you’re talking an extra $100 expense every month.

Your credit card statement isn’t the only place you’ll see higher payments as interest rates climb.  Adjustable-rate mortgages, home equity lines of credit, auto loans and other loans with variable rates of interest will also go up.

People with big adjustable rate mortgages will really feel the squeeze. Reuters ran the numbers.

The average rate on a five-year Treasury-indexed adjustable-rate mortgage is currently about 3.67%, according to Freddie Mac. ARM rates are modified annually, so a 0.25 percentage point increase in the rate in March wouldn’t have an immediate effect. But when it does kick in, it could add up to $1,250 a year to interest payments on a $500,000 mortgage. That mortgage owner could pay an additional $312.50 a month, or $3,750 a year, in interest if the Fed follows through with two more quarter-point hikes this year.”

Then there are the folks with the home equity lines of credit. The interest rates now hover around 5%. Upping that by a quarter-point would add roughly $6 a month to the payment for somebody with a $30,000 line of credit. And as with credit card bills, you have to consider the cumulative effect since the Fed started tightening in 2015. That brings the payment increase to about $37 a month or $444 extra per year.

Of course, the Fed rate hike will also put upward pressures on conventional fixed mortgage rates. This could have a chilling effect on the real estate market. As we reported earlier this week, there are already storm clouds brewing in the housing sector.  People with average incomes cannot afford to buy an average-priced home.

On the flip side of the equation, rising interest rates are good for savers. A healthy economy needs savings for investment and capital expenditure. In the big scheme of things, the US economy needs a normalized interest rate environment. But after a decade of easy money, it isn’t going to react well to having its punch bowl yanked away. The central planners depend on you and I spending every penny we earn in order to finance their Keynesian dreams. Normalizing means pain and Americans don’t have any tolerance for pain.

The pundits and politicos expect economic growth as far as the eye can see. But it’s a little hard to grow the economy when Americans have to pay more and more every month just to service their ever-growing debt. As Peter Schiff said last week, Americans are already broke. It doesn’t look like that’s going to change anytime soon.

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