While the Federal Reserve eyes a fourth federal funds rate hike in the last twelve months, experts warn that just because you haven't yet felt the pain in your finances, doesn't mean you won't.
"Fed rate hikes take about 12 months to really take effect, so while consumers may be paying a bit more in the near term, it really is the cumulative impact of those extra payments that adds up over time," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Investment Institute.
Recent numbers from a Wells Fargo/Gallup study showed two-thirds of people said they said they had not noticed any impact of higher interest rates on their finances, with the rest of investors split between saying they have noticed a positive — 13% — or a negative — 14% — impact on their finances.
While the pace at which rates have been rising has been so slow that many investors may not feel the heat yet — it is clear the heat is coming.
"The continued rise of interest rates will continue to be passed down to the consumer," said Sean Hughes with the Hughes & Dern Financial Group in Illinois. "Credit cards are directly impacted by the federal funds rate. The most recent increase of (a quarter percentage point) was passed directly to the consumer. Credit card companies charge interest using a spread based on the federal funds rate. When the Fed rates go up, the credit card companies have to raise their interest rates to keep the spread."
Aside from just credit card rates bumping up, Hughes reminds there are other monthly bills that are interest driven and thus will be affected.
"If you have an adjustable rate mortgage, then you can plan to see an increase," Hughes said. "As interest rates rise, eventually inflation will climb back up and all of a households monthly bills will increase."
It is important to remember any variable rate loans that are indexed with rates will be impact, said Mike Chadwick, with Chadwick Financial Advisors.
"People have been spoiled for many years now and we're in a debt bubble on many levels," Chadwick said. "We're seeing retail spending come to a crawl, I'm sure this is a big factor in that change. We need to teach people to live below their means and save money, not spend every nickel they make and push consumerism. The government will also need to learn this lesson, although I suspect the class will be painful for them."
Hughes said consumers can prepare by refinancing adjustable rate mortgages to a fixed rate — if possible, and for large credit cards, it often makes sense to transfer the balance to a zero percent card for a period of 12 months and pay down the debt as much as possible.
Those in the market for big ticket items likely will soon start to be affected by the recent rate hikes and those soon to come, said Babak Hafezi, CEO of HafeziCapital in Virginia.
"In the past few quarters we have seen home prices increase dramatically," he said. "The Fed funds rate increase will eventually force many people to not be able to afford home buying and thus decrease home prices in general. We will see similar impacts on the car market, and the credit card markets."
Hafezi adds the ripple effect could force a slowdown in the U.S. economy and potential recession if the rates are increased too quickly — affecting many in the workforce. The worst aspect of this will be on the weak corporations that needed cheap credit to survive.
"In the coming quarters we will finally see who has been swimming naked as the tide comes in," Hafezi added.
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