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What Experts Expect from a Fed Rate Hike in Early '15

NEW YORK (TheStreet) -- Did Federal Reserve Bank of St. Louis President James Bullard let the cat out of the bag and give a "trigger date" for the fed to finally hike interest rates?

Well, yes he did -- even according to Bullard, who doesn't seem to be beating around the bush.

In an interview with the Fox Business Network last week, Bullard "predicted" interest rates, specifically the Federal Funds rate used by banks and lenders to set their interest rates, would rise in the first quarter of 2015.

Bullard, citing sustained lower unemployment and bottom barrel inflation, said the Fed is ready to lift rates for the first time in eight years. 

"I've left [my prediction] at the end of the first quarter of next year," he told Fox. "The Federal Reserve Open Market Committee is closer to its goal than many people appreciate. We're really pretty close to normal.

Here's how some of the best minds in the investment business see a higher rate hike affecting Main Street financial consumers:

John Walsh, president of Total Mortgage Services: With quantitative easing winding down and inflation seemingly on the rise, the Fed seems inclined to raise rates in the coming year, although there is no clear consensus among Fed members as to the timing of the hike. 

Also see: Why Bank Customers Keep Suffering: Low GDP Means Fed Stays Course

When the expectation that a rate hike will occur takes hold of the markets, we will see interest rates rise. When it became clear that the Fed would begin to taper QE, the average rate on a 30-year fixed-rate mortgage rose by nearly 100 basis points in a two-month span (from May to July of last year). When the reality of a rate hike sets in, we will likely see another spike in mortgage rates.

Unless inflation begins rising sharply, I do not believe the increase in rates will be as swift as the one that we saw last year, but consumers need to be aware of the possibility, and act accordingly. Those looking for a new loan would be prudent to lock in a rate sooner rather than later. At some point in the next year, I believe we are going to see higher mortgage rates.

Andrew Carrillo, president and CEO of Barnett Capital Advisors: The Fed has been saying that they're going to raise rates for quite a while now. 

Higher rates will cause a recession. High rates will also send interest on the national debt skyrocketing due to the U.S.' short-term debt structure. Higher rates without high inflation will also cause a decrease in home prices. It's for this reason I doubt the Fed will voluntarily raise rates until inflation is much higher and they're forced to. So I am really not sure they're going to raise rates voluntarily.

Either way, higher rates can positively and negatively affect consumers; it depends what side they're on, whether they're saving or borrowing. It will have this effect on the following types of consumers: 

Also see: Here's Why the Fed Isn't Hiking Rates Anytime Soon

  • Consumers with large variable debt will be hurt. Their payments will increase and they will be paying more toward interest. This will cause variable mortgage payments to increase and will increase defaults and foreclosures.
  • Savers will benefit. Savers have been hurt over the past six years with record-low rates while subsidizing the debtors. The Fed speaks about these low rates as if there is only a net benefit, but there are two sides to the issue. The post-recession era has been a wealth transfer from savers to debtors, and now higher rates will begin to favor savers. 
  • Credit card rates will increase, as credit cards are linked to the prime rate. As rates increase, so will credit cards interest rates. This will hurt consumers who have a lot of debt and whose interest payments will surge.

All in all, it's a lot easier for the fed to lower rates than to raise them. It's for that reason they continue to push back the actual year of interest rates hikes. They will likely lose control eventually and rates will spike as investors fear inflation and get tired of losses on bonds.

Armando Roman, member of the National CPA Financial Literacy Commission: A rate hike has the impact of tossing a small stone into a still pool of water. The ripples affect everything, but not right away. 

The immediate impact is on mortgage interest rates and consumer loans tied to the prime interest rate. A small interest rate increase will have minimal impact on the economics of financing a home or consumer borrowing, but could have a much greater impact on the general outlook, as perceived by consumers. For example, consumers could view this as a baby step toward the so-much-talked-about possible hyperinflation. If the consumer sentiment views this as overly negative, it will affect consumer spending, decreasing consumer spending and home purchases.

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