Fed Halt Could Hurt You

Will other central banks follow China's lead, and how much diversification will overseas central banks seek? Depends on how good a job the Federal Reserve does in generating confidence in its policies after it stops raising rates.

Gas Prices Will Rise

Oil is priced in dollars, and anything that erodes the confidence of oil producers in the future value of the dollars they get for their oil will lead them to ask for more current dollars to make up for the risk. The OPEC (Organization of Petroleum Exporting Countries) and non-OPEC oil producers know they're sitting on a finite resource; if the dollar starts to decline in value, expect oil producers to factor that into their prices.

Mortgage Rates Will Rise

This certainly seems counterintuitive: How can you wind up paying more interest when the Federal Reserve has stopped raising interest rates? Because the interest rates on many mortgages are pegged to long-term interest rates -- such as that on the 10-year Treasury note -- but the Federal Reserve controls only short-term interest rates.

In 2004 and 2005, short and long rates converged. One reason was that, with the Federal Reserve raising short-term rates, investors felt that long-term inflation was under control and that they could accept a lower yield on a long-term investment, such as a 10-year bond.

On Jan. 5, the three-month Treasury bill yielded 4.19%, and the 10-year Treasury note 4.35%. That spread -- 0.16 percentage points -- isn't much for the added risk of locking up your money for 10 years. Rates on a 30-year fixed-rate mortgage ranged from 5.6% to 6.2% last week.

But with the Fed moving to the sidelines, with a new Fed chairman and with a falling dollar, the risks to long-term bondholders rise, and there's a good chance that long-term interest rates will start to creep upwards.

No one with an existing fixed-rate mortgage needs to worry -- unless they're looking to move up to a new home and need a new mortgage. But any increase in long-term interest rates will gradually take a bite out of the cash flow of anyone with an adjustable-rate mortgage.