All it took was speculation that the Federal Reserve could slow its bond buying months from now – and then a few words Wednesday from Chairman Ben Bernanke to confirm it. The result is that record-low interest rates that have fueled economic growth, cheered the stock market, shrunk mortgage rates but punished savers are headed up. Here’s how higher rates will affect consumers, businesses, investors and other players.
Consumers: The main impact on consumers will likely be higher mortgage rates. Rates on auto loans, student loans and credit cards probably won’t rise much soon. They’re more closely tied to the short-term rate the Fed controls. That rate isn’t expected to rise before 2015. The average rate on a 30-year mortgage jumped from a record low of 3.31 percent in November to 3.98 percent last week, according to mortgage giant Freddie Mac. That’s the highest point in more than a year.
Savers: Higher rates generally benefit those with much of their money in savings. They can earn more on bond investments, CDs and savings accounts. But savers aren’t likely to enjoy much benefit soon. Banks already have plenty of deposits. They don’t need to boost rates on CDs or bank accounts to attract more cash.
Bond investors:. Ordinary investors who have soured on stocks have poured about $1 trillion into bond funds since the Great Recession began in December 2007. A common assumption is that bonds aren’t very risky. These investors might be having second thoughts. That’s because as rates rise, bond investors can lose principal as the value of their existing bonds declines.
Small businesses: Higher rates could further depress loan demand at many small businesses, at least in the short run. But higher rates can also benefit small business because they signal that the economy is strengthening. Once companies make more money because they have more customers, they’re more inclined to expand or buy equipment even though financing is costlier.
Government deficit: The federal government – the nation’s biggest borrower, with a $17 trillion debt – might have the most to lose from higher rates. The super-low rates of the past few years have given the government a break at a time when the annual deficit was soaring. After four years of $1 trillion-plus deficits, the nonpartisan Congressional Budget Office has forecast that the deficit will shrink to $642 billion this year. That would be down from $1.09 trillion in the 2012 budget year.