While a steady economy and improving unemployment rates have many convinced a rate hike is in order for the United States, there is plenty of reason for the Fed to play it safe before issuing an increase.
Some say low interest rates have helped stimulate recent economic growth by making money cheap to borrow. Companies invest more in their operations, and consumers buy more houses, cars and other large-ticket items.
However, others argue, the more people buy, the more manufacturers believe they can charge, and this can lead to inflation. The Fed tries to pre-empt this from happening by raising interest rates to slow inflation and keep supply and demand in check.
There are positives and negatives to an interest rate increase, and how it affects you depends on your financial situation.
One positive of interest rate adjustments is the prevention of artificially cheap capital that might be enticing at the present moment, but doesn’t necessarily increase productivity, and can stunt long-term growth. At least one industry analyst contends that raising rates is necessary to curb excessive borrowing and the allocation of capital into less productive ventures.
A change in the direction of interest rates is likely to impact us all in various ways and to various degrees — affecting everything from mortgages and car loans to credit card debt, investments and savings accounts.
One area of the U.S. economy that has been on the decline, even with low interest rates, is homeownership. The percentage of people who own homes is approaching historic lows, currently at its lowest point since 1967.
The hardest hit demographic is Generation X, which was in a prime position for a first-time home purchase, or to trade-up after having children, when the real estate market crashed. Now, homeownership rates among gen-Xers (ages 35-54) have fallen further than any other age group. Compared to same-aged households 20 years ago, they are 4 to 5 percentage points lower.
As evidenced with the surprisingly low homeowner statistics, predicting interest rate and the economy’s effects on the nation as a whole can be difficult. But, as always, our focus is on your individual financial situation. If we can help you understand your financial future, and how the current interest rate environment applies to you, please give us a call.