Fed: Time to hike rates
Short-term financing costs, such as car loans, likely to rise, with more increases in coming year
The cost of borrowing for cars, home equity loans and home mortgages is most likely headed higher after the Federal Reserve raised interest rates Wednesday for the first time in nine years, a move that ends a long period of record-low rates crafted to combat the Great Recession.
The Fed on Wednesday announced a 0.25 percent increase in short-term interest rates that the nation’s central bank controls. It’s the first time since June 2006 that the Fed has raised interest rates. Since December 2008, the Fed has kept interest rates between zero and 0.25 percent.
San Francisco-based Wells Fargo Bank wasted little time and raised its prime lending rate 0.25 percent, to 3.5 percent, effective Thursday, up from Wednesday’s rate of 3.25 percent.
“Economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate,” the Federal Reserve’s Open Market Committee said in a statement that accompanied the move toward higher interest levels. The Fed’s vote was unanimous.
The Fed is raising rates at an odd time for the U.S. economy. Normally, the Fed raises interest rates to help ward off inflation in a red-hot economy and lowers interest rates to spur economic activity and job creation. Some experts fear that higher interest rates could hobble the job market and business activity, which have been improving but are not consistently robust across the country.
Nevertheless, inflation nationwide appears relatively tame. The national job market is creating a respectable — but not extraordinary — 200,000 or more jobs a month. And the economic expansion is aging by most benchmarks and could falter.
“It makes me wonder what will higher interest rates do to the economy in 2016, given that the economy already seems to be losing momentum,” said Mark Vitner, senior economist with Wells Fargo.
The Fed hopes that the nation’s economy is robust enough to withstand higher costs for obtaining credit. The Bay Area and Santa Clara County, in particular, may be better suited than the nation to maintain economic momentum despite rising interest rates.
Over the 12 months that ended in October, total payroll jobs grew 3.9 percent in the Bay Area, 5.2 percent in Santa Clara County, 4.7 percent in the San Francisco-San Mateo region, 1.9 percent in the East Bay and 2.9 percent in California. The United States posted only a 1.9 percent gain in total payroll jobs over the one-year period.
“The Bay Area economy is strong enough to weather modest rate hikes,” said Scott Anderson, chief economist for San Franciscobased Bank of the West. “The Fed wanted to raise rates because they are seeing reports from parts of the country that signal rising wage and inflation pressures, including the Bay Area. Those are the sorts of reports you get as you approach full employment.”
While interest rates for mortgages may rise, they’re not expected to skyrocket and may not impact real estate in regions like the Bay Area with already strong demand for housing.
“Mortgage rates may rise somewhat, but not a great deal,” said economist Peter Morici, a professor with the University of Maryland. “Consumer loans for items such as cars will be more expensive. Banks and lenders may insist on a higher quality of borrower so loans may be harder to get.”
Thomas Norman, a San Francisco resident, recently obtained a home equity line of credit and also intends to put his single-family home up for sale, although the timing isn’t certain.
“I’m concerned about being able to sell my house at the price I want because buyers may face higher borrowing costs for their loans,” Norman said. “I might not be able to get the price I would otherwise.”
Savers could benefit from rising interest rates for bank accounts, money market instruments and certificates of deposit. But it’s also possible that benefits from higher interest rates for bank accounts could be undermined if banks seek to impose new fees on customer accounts. Still, if savers can earn more interest on their accounts, that would be a welcome contrast to the last several years of near-zero interest rates.
It’s also possible that multiple increases in interest rates are in the works for 2016, Vitner said, referring to a chart produced Wednesday by the Fed that indicated where the central bank believes interest rates should wind up in the coming years.
Between now and the end of 2016, interest rates are viewed as going up 1 percentage point, according to the Fed’s chart. That could mean four increases in rates next year, if each one is 0.25 percent.
The nation’s stock markets jumped after digesting the rate increase and the Fed’s comments about what is being dubbed “liftoff.” The blue chip Dow Jones industrial average rose 1.3 percent, the broad-based S&P 500 and the Nasdaq composite were up 1.5 percent and the SV150 index of Bay Area tech stocks gained 1.9 percent.
Rates for loans to purchase or refinance houses aren’t tied directly to the Fed’s actions, but rather changes in instruments such as 10-year Treasury notes. On Wednesday, interest rates on 10-year Treasury notes were roughly unchanged at 2.29 percent. The highest rate for the past 52 weeks was 2.49 percent, set in June, and the lowest interest rate for the 10-year note was 1.67 percent, reached in January.
Joel Naroff, president of Pennsylvania-based Naroff Economic Advisors, believes the economy will be strong enough next year to remain afloat even with the headwinds of rising interest rates.
“The economic environment is setting up for a very solid 2016,” he said.