Rising interest rates, impact on borrowing and consumer spending among unknown factors
The Federal Reserve voted to increase its key interest rate today, upping the rate 0.25% to a target of 1% to 1.5%. It is currently at 0.91%.
The 0.25% increase is an indication the Fed sees the economy on solid footing, even if some indicators of late might suggest otherwise. Wages are not rising as fast of expected and inflation is going down, dropping to 1.5% in recent months, below the Fed’s 2% target. On the flip side, low unemployment – at 4.3% it is at the lowest level in 16 years – is an indication the economy is improving, and the Fed has lowered its outlook for unemployment for 2017, expecting a 4.3% rate at the end of the year versus 4.5%. It did, though, increase its anticipated GDP growth for 2017, moving a 2.2% forecast, up from 2.1% in March.
While a 0.25% hike does not seem significant, it could have a detrimental effect on consumer spending if the Fed is wrong about the improving economy. And that could have a significant effect on freight flows.
“The increase was small, which will likely not have large noticeable impacts on the industry,” says John Engstrom, equity research associated at Stifel. “This is indicative of the Fed’s internal belief that the economy is improving despite inflation now stepping up.”
When the Fed increased the rate one-quarter point in December, financial firm TransUnion found that 8.6 million consumers could not afford the hit they took in rate increases on everything from auto loans, to credit cards, to mortgages. That occurred, the firm said, even though the average impact was just $18 per month.
The low rate over the last several years has resulted in millions of consumers benefitting, TransUnion says. Consumers now hold $3.8 trillion in debt, the firm reports – up 31% over the past 5 years. More than a quarter of that debt – just over $1 trillion – is considered revolving debt whose rates are typically based on the prime rate. Any move in that rate, such as this 0.25% increase, immediately impacts that debt.
WalletHub notes that consumers are expected to pay $6 billion more in credit card interest payments this year due to the last three rate hikes.
The same holds true for trucking companies looking to purchase equipment, refinance debt, or who may have lines of credit or loans that feature variable rates based on the prime rate. Although a quarter-point increase may not be a significant amount – a quarter point increase translates to $2.50 more for every $1,000 borrowed – experts suggest watching for future increases that compound the impact.
For example, a consumer who purchases a $35,000 new car with a 60-month loan would pay an average of $4 more per month, the Motley Fool explains, or $236 more in interest over the life of the loan. Not a lot, but the Fed keeps raising the rates (it raised the rate 0.25% in March), in a year or two, that $4 a month could quickly become $20 per month.
