Consumers unlikely to notice effect of expected Fed rate hike

After months of speculation, the Federal Reserve is expected Wednesday to raise a key interest rate that has held steady for seven years.

The move by Federal Reserve Chairwoman Janet Yellen and her colleagues is a mostly symbolic indication that the board feels the economy finally has recovered enough from the Great Recession to increase the short-term interest rate slightly.

The expected increase would be just 0.25 percentage points, and consumers likely would not notice an immediate change. The next similarly small move probably would not come until March or early summer.

"All interest rates move together, so you would expect to see mortgages climb a bit and car loans increase," Greg George, associate professor of economics and director of the Center for Economic Analysis at Middle Georgia State University, said in an email. "Likewise, any variable rate loan (like credit cards) will climb as well. This puts a damper on consumer spending."

But the rate has been so low for so long and the Fed is going to inch it up gradually, so the lag time for it to affect consumers is expected to be lengthy.

"So, I wouldn't expect to see a dramatic shift in the economy," George said.

Greg McBride, chief financial analyst for financial information website Bankrate.com, said the small increase is "much like that first dusting of snow. That's not what cancels school and messes up traffic. But it's the signal that winter's coming."

The federal funds rate applies to short-term lending between banks from the reserves they hold at the Federal Reserve. But the rate affects other borrowing costs and has become a benchmark for savings accounts, certificates of deposit, credit cards, auto loans, small business loans and home equity lines of credit.

The federal funds rate has less of a direct effect on longer-term loans, particularly mortgage rates. Those rates generally have already risen in anticipation of the Federal Reserve's action.

"Savers are winners with higher interest rates (as borrowers lose)," George said. "Retirees have suffered in the environment of low interest rates recently. Pension funds are strained as well. Many investors have sought higher yields in riskier investments such as the stock market."

When bond rates climb, investors may get out of the stock market and look for safer returns from bonds, he said.

"Again, this depends on how sensitive investors are to small changes in already-low bond yields," George said. "The Fed keeps a close eye on the stock market and bond markets and has been concerned about low returns for retirees."

The Federal Reserve's actions get diluted as they flow through the financial system, particularly to the savers who have been hardest-hit by the near-zero interest rate. Savers shouldn't anticipate a bump in their balances anytime soon because banks, squeezed by low rates and holding record-high deposits, aren't eager to start paying out more to their customers.

The last time the Fed began a period of rate boosts was in 2004, when it made a similar 0.25 percentage point move. It increased rates 16 more times over the next two years.

Information from the Los Angeles Times was used in this story. To contact writer Linda S. Morris, call 744-4223 or follow her on Twitter@MidGaBiz.

This story was originally published December 15, 2015 at 10:27 PM with the headline "Consumers unlikely to notice effect of expected Fed rate hike ."