How Do Rising Interest Rates Affect The Average American?

The latest FOMC minutes released this week suggest that another small interest rate hike could be coming as soon as June. Wall Street and economics gurus love to make a fuss over the timing and potential implications of interest rate changes, but not every American is a bond trader, an economics professor or a monetary policy connoisseur.

Much ado about nothing?
From a practical standpoint, what would a 0.25 percent June interest rate mean for the average middle-class “Main Street” American? Very little.

In fact, if you’ve been wondering how a June rate hike will impact your life, ask yourself this question: how is your life different than it was five months ago? That’s when the Federal Reserve made its first rate hike since 2006. Maybe since it’s now May, Americans in the southern states have more of a tan than they did back in December. But from a financial standpoint, very little has changed.

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Slow and Steady
Interest rates actually do have an impact on the average American, but it’s part of the Federal Reserve’s goal to raise rates so slowly and slightly that each individual hike doesn’t rattle the cage, so to speak. For example, the last Fed rate tightening cycle took the fed funds rate from 1.0 percent to 5.25 percent over roughly a two-year period of small hikes.

Cumulative Changes
By the end of the tightening cycle, rising interest rates will subtly impact the average American in a number of ways. Americans with debt could see a two or three percent up-tick in credit card, mortgage and/or adjustable student loan interest rates.

On the flip-side, savers typically benefit from rising interest rates. But if you are hopeful that in 2017 you will be able to get a 5.0 percent interest rate on a CD or high-yield savings account, you will likely be disappointed.

Banks are under no obligation to raise interest rates along with the Fed, and this cycle, especially, they will likely drag their heels as much as they can. Bank margins are currently at all-time lows. Rising interest rates will allow banks to inflate those margins a bit by charging higher rates on their loans while simultaneously maintaining lower rates on their deposits.

The Bottom Line
Yes, you may soon be paying a few extra bucks per month on your loans. But outside of large borrowers and savers, rising interest rates should be welcome news for the average American because they are typically a sign that the economy is healthy and strong.