Federal Reserve Chair Janet Yellen is expected by the vast majority of traders and analysts to announce an increase in the central bank’s target for the federal funds rate—a bank-to-bank interest rate closely followed by rates of other assets, like bonds and mortgages—after Wednesday’s policy meeting. But the federal funds rate hike won’t affect all Americans equally.
Consumers’ ages may determine whether the interest rate increase is good or bad news, while those considering buying a house may be pushed into making a decision quickly. The supply side of the American economy also stands to take a hit, as the rising dollar value could make U.S. exports more expensive in international markets.
Older, more financially-established Americans should prepare to celebrate the Fed’s decision, according to Steve Rick, the chief economist at the insurance and financial services company CUNA Mutual Group.
“If you’re part of the older group in this country, who will see higher interest rates on their bonds and certificates of deposit—they’ll be happy,” Rick said in a phone interview.
Millennials, however, could be feeling the Fed’s interest rate increase, from its current level of between 0.25 and 0.5 percent to a band of between 0.5 and 0.75 percent, the most, he said. And it’ll mark a tough turn after seven years of near-zero rates, the Fed’s policy response to the recession.
“Younger people, they’ve benefitted from this over the past seven or eight years—they’ve seen low interest rates on cars and homes,” Rick said, adding that that’s about to change. “With the federal funds rate, adjustable rate credit cards, auto loan rates will immediately go up.”
Today’s millennials, on average, are in debt until age 30, with the most recent graduates holding an average net worth of about -$34,000 and 27-year-olds still in the red by more than $10,000, according to estimates by The College Investor. The Fed has helped push down payments on student loans, credit card debt and cars since the financial crisis, but the period of low rates is coming to an end, as most analysts expect the Fed to raise rates several times next year.
That upward trend is already well underway. Interest rates on various forms of debt have sprung up “dramatically” since Donald Trump’s Nov. 8 election upset, as higher demand for U.S. government bonds has pushed up their yield, said Peter Nigro, a Bryant University School of Business professor and former senior financial economist at the Office of the Comptroller of Currency. Like the federal funds rate, the yield on U.S. government bonds tends to influence a litany of other interest rates.
One form of debt that’s about to become noticeably more expensive is the home mortgage, specifically those with adjustable rates, which have jumped to 3.17 percent from 2.88 percent since the election. Nigro expected those rates to rise by the same amount as the Fed's interest rate increase. The rate on 30-year fixed mortgages has also leapt since the election, to 4.08 percent from 3.57 percent. Nigro projected that it would hit 4.5 percent in the next six months.
“It’s going to be more expensive to buy a house, and it’s going to be more expensive for people thinking of moving up,” he said, adding that, for those with adjustable-rate home loans, how soon they end up paying “a couple hundred bucks” more per month will depend on how fast their contracts will allow their rates to adjust. “Banks are always quick to raise rates on debt.”
People uncertain as to whether to purchase a house may want to hurry up and buy, but may have missed their chance to cash in on low rates, Nigro said, as the rate surge since Trump’s win already “has had an impact on the market.”
Americans mired in debt won’t be alone in terms of suffering financially.
As higher interest rates tend to drive up the value of a country’s currency, American products sold in dollars on the global market become relatively more expensive. In 2015, the total value of U.S. exports was about $1.5 trillion, down from $1.633 trillion in 2014, according to the Central Intelligence Agency’s World Factbook. Between 2014 and 2015, the weighted average foreign value of the dollar against a broad index of currencies has risen more than 25 percent.
American producers who rely on buyers outside the U.S. will at first benefit from their products’ higher prices. But as buyers start to take note of the change, those American companies’ sales may begin to dwindle.
The interest rate increase won’t stop after the Dec. 14 meeting, either. Like many analysts, Nigro projected two or three Fed interest rate hikes next year, while Rick forecasted “three or more.”
Correction: An earlier version of this story misspelled the last name of Peter Nigro.