Interest rates will rise quickly and those hikes are going to be pretty big. Those with home equity loans, credit card debt and other variable rate loans will soon feel the pinch in their wallet, forcing them to cut back in other areas if their finances are already stretched thin.
As Forbes reported, when the Federal Reserve Board (The Fed) changes the rate at which banks borrow money, this typically has a ripple effect across the entire economy including equity prices, bond interest rates, consumer and business spending, inflation, and recessions. As far as the big picture goes, there is often a delay of a year or more between when interest rates are initially raised, and when they begin to have an effect on the economy. As consumers, however, we feel these increases almost immediately. Americans will begin to feel the burn in the floating rate debt they are holding. This includes credit cards, student loans, home mortgages, and equity loans because all move right along with the Fed.
Because interest rates have been rising at a slow pace, most haven’t noticed the effect just yet. But according to research by Forbes, evidence strongly indicates long-term U.S. interest rates are at a secular decision point, one that is likely to eventually be resolved by significantly higher borrowing rates over the next one to several quarters.
The Fed is is currently in the midst of a hiking cycle that began at 0.25% in December 2008. The S&P 500 actually bottomed three months later, in March 2009, shortly after President Obama first took office. Short-term rates have slowly risen since then, by another 50 bps to 0.75% in late 2016, by an additional 75 bps to 1.50% in 2017, and by another 75 bps to 2.25% thus far in 2018. –Forbes
The other factor to consider is that consumer spending currently comprises 68 percent of the United States’ economy, and U.S. household debt has risen over the past 18 months, especially in floating credit card debt which is up 2.6 percent according to the Federal Reserve Bank of New York, Center for Macroeconomic Data. If a quick and big spike in interest rates does happen to occur, Forbes anticipates that that would have a meaningful adverse effect on the U.S. economy in 2019, as well as on U.S. equity prices.
The best way to prepare for this is to begin to aggressively pay off any loans that move along with the Fed’s interest rate hikes. Pay down the lowest amount first and then take that money you were spending on the small loan and apply it to a bigger one until it’s paid off, and so on. Take steps to eliminate debts that are subjected to the Fed’s hikes now so that you won’t feel the pain as much in the future.