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Fed Rate Hike: When and How Much It Will Cost You

Sept. 19, 2016
Mortgage Rates, Mortgages
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The hand-wringing over a quarter-point Fed rate hike is on. That’s the amount the Federal Reserve is expected to raise short-term interest rates; the question is, when? The Fed meets this week, announces its decision on Wednesday and meets twice more before the end of the year.

When the Fed pulls the trigger, here’s what to expect.

It’s a matter of time

Steve Rick, chief economist at CUNA Mutual Group, a financial product provider for credit unions, believes the nation’s central bank will wait on raising short-term interest rates until its December meeting.

“Wages are still rising by 2.6% year over year, and unemployment is kind of stuck at 4.9% and hasn’t dropped much. And so, with inflation still running low and wage pressures not building, I think that gives the Fed the leeway to have a little bit more patience and keep interest rates at exceptionally low levels for another two to three months,” Rick says.

Robert Dietz, chief economist for the National Association of Home Builders, is another December believer.

“We are forecasting one rate hike in 2016, after the December meeting,” Dietz says. “NAHB believes that mortgage interest rates will remain at historically low levels in the quarters ahead. Income growth and solid job creation are positive tailwinds for the housing market, and we are finally seeing evidence of builders moving into the entry-level market.”

Seeing the futures

These two economists aren’t the only ones betting the Fed won’t move on interest rates until December. Big money runners do, too.

Institutional investors, hedge funds and the like stake a claim on the price of something on a future date. These “futures” are time and price investment contracts sold on everything from pork bellies to the weather — and Federal Reserve short-term interest rate hikes.

Based on recent futures activity, the greatest share of Wall Street is betting on a Fed move no sooner than December, as you can see in the graph below.

Banks stand to benefit from a Fed rate hike

Jamie Dimon, CEO of JPMorgan Chase, believes it’s time for the Fed to start raising interest rates — now. “Twenty-five basis points (0.25 percentage point) is a drop in the bucket. Let’s just raise rates,” he said, speaking at the Economic Club of Washington last week.

Of course, most lenders would likely agree. When interest rates finally move up, banks, credit unions and other financial institutions will earn more in interest on the capital they have to lend, which enhances their profit margins, Rick says.

“Plus, short-term Treasury yields would go up,” he adds. “Plus, things like adjustable-rate credit cards will reprice, adjustable-rate mortgages will reprice, home equity loans will reprice. It will help the banking system. Banks and credit unions will be able to build capital faster, which will strengthen our banking system.”

Guess who pays for all of that repricing. Consumers do.

With a rate hike, how much more will you pay?

A just-released TransUnion study measured the impact of interest rate increases on consumers. “[We] analyzed consumers with variable-rate products such as credit cards, HELOCs, and some mortgages and personal loans,” says Nidhi Verma, senior director of research and consulting for TransUnion.

The study showed that with an expected 0.25 percentage point rate increase by the Fed, more than 92 million U.S. consumers holding variable rate credit products will see their monthly payments rise, but only by an average of $6.45.

More than 9 million consumers will be at risk

However, TransUnion says 10% of these borrowers — over 9.3 million people — will not be able to absorb the additional cost.

“A portion of those consumers have an adjustable rate mortgage that will reset in the future or may have other variable rate products that could adjust in the future,” Verma says.

And if the Fed proceeds with additional hikes into 2017, as is widely expected, TransUnion’s study found that with interest rates rising just 1 percentage point, an additional 2.5 million consumers might not have the financial capacity to absorb the “payment shock.”

That’s a total of 11.8 million consumers at risk of falling behind on their payment obligations.

But there are also consumers who would be unaffected by rising interest rates, TransUnion says.

“For instance, some consumers are transactors — they pay their balances in full each month,” Verma said in a press release. “Some already have an APR of 29.99%, the highest permissible rate. Our data show there will indeed be an impact from potential interest rate rises, but it’s far less widespread than many anticipate.”

A looming boon?

Even if higher interest rates loom, Jeff Taylor, managing director of Digital Risk, an independent processor of home loans, isn’t looking for a major boon to home sales or mortgage refinances.

“Rates have been historically low for so long that most people who want to refinance have already done so and buyers looking to purchase may have trouble finding a house, given skyrocketing home prices and low inventory in many markets,” Taylor says.

The Fed raising interest rates is an indication of a healthier economy, Taylor says, which spurs more consumer confidence and encourages consumers to purchase or refinance homes. And that might mean a boost in mortgage lending this fall and winter, traditionally slower seasons for homebuying and lending.

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Hal Bundrick is a staff writer at NerdWallet, a personal finance website. Email: [email protected]. Twitter: @halmbundrick