Double Digits? Be Prepared for Rate Increases

With the Federal Reserve's surprise half-point cut to the fed funds rate last week, investors and consumers may have breathed a sigh of relief expecting the continued low interest rates we have grown accustomed to in the past several years.

Low interest rates are a good thing for those with credit card debt or variable-interest-rate mortgages. But if recent comments by former Fed Chairman Alan Greenspan are any indication, these latest interest rate moves may very well be the calm before the storm.

Greenspan said that globalization kept inflation under control by keeping wages low while he was in charge of the Fed, but that effect can't last. Developing countries like China will see price pressures and higher wages, as the flow of people into the work force from farms to factories begins to slow.

These inflationary trends will have a global impact. Eventually, Greenspan believes that consumers should expect double-digit interest rates -- something the U.S. hasn't seen since the 1980s.

Greenspan isn't alone in this opinion. While inflation isn't as much of a concern to the Fed over the short term as confidence in the market due to the subprime mortgage problems, other economists believe that inflation will be a concern for the Fed over a five-year period.

Understanding that economic forces will likely bring about higher inflation, and taking steps to prepare yourself for double-digit interest rates will allow you to lessen the pain and possibly even profit from the event. Here is what you should be doing:

1. Pay off credit card debt: You should be doing this no matter what, but if double-digit interest rates will be coming in the near future, it is even more essential. If you have a balance on your credit card, it's time to pay off that debt as soon as possible. As interest rates rise, so will the interest rate that you must pay on the money you borrowed from the credit card company.