The director of UCR’s School of Business Administration Center for Economic Forecasting and Development, Christopher Thornberg, has discussed the likely implications of the Federal Reserve’s increase in its short-term interest rates on American families.
For the first time since December 2008, the Fed has chosen to raise its short-term interest rates. These interest rates will now be set at a range between 0.25 percent and 0.5 percent after having remained at a near-zero rate for the past seven years.
This rate increase demonstrates the increasing confidence seen in U.S. economic activity in terms of job restoration and rising household incomes said Fed Chair Janet Yellen. Changes that the Fed makes in short-term interest rates have a direct impact on the economy, as seen when taking out new loans, but only an indirect influence on long-term borrowing rates.
Because the government is the largest borrower in the nation, their borrowing costs are expected be the most heavily impacted. Mortgage rates are also expected to witness a long-term increase, leading to higher costs on cars and homes.
Thornberg believes that this interest rate increase will not affect American families as much as one may expect. “The Fed does not directly set bond rates, mortgage rates, the prime rate, or myriad other percentages that are attached to loans in our economy. Market forces set all those rates — basically the supply and demand for lending capital.”
This single rate changed by the Fed only serves as a single variable in how long-term borrowing costs are influenced. Loans linked to long-term interest rates are not expected to see a drastic change nor are credit card rates according to Yellen.
On the other hand, an expected benefit provided by the short-term interest rate increase will be the higher monetary returns made to banks, money-market funds and other modes of savings vehicles. Federal student loans are also expected to remain static because the interest rate is fixed.
“I guess if the federal interest rate is raised then some students would be less inclined to take student loans since their interest rates would be increased as well, if they are borrowing from banks like I am,” elaborated Brian Kuan, a third-year business administration major. “Also for people who own stock and bonds their interest rates would be raised as well, which I guess is a bad thing because people will be willing to buy bonds and stock. But this is all long term, short term it won’t really affect us too much.”
Through this interest rate increase, the Fed also hopes to foster continuous growth in the labor market and return to a 2 percent inflation rate.