Why You Shouldn't Worry About A Fed Interest Rate Hike

It'll be an increase of one-quarter of 1 percent, which most Americans will barely notice.
Cliff Owen/AP

The Federal Reserve Board's Federal Open Market Committee meets next week, and there's a small chance that it will raise interest rates for the first time in nine years.

Media coverage of this potential rate increase has been incessant, and at times hysterical. But experts say that for most Americans, the real impact of a rate increase like this would probably be quite small -- at least in the short term.

The federal funds rate, which is what people are usually referring to when they talk about the Fed raising interest rates, is the interest rate on the money that banks lend to each other, typically overnight. Since 2008, the Fed has had a target rate of 0.0-0.25 percent. If the committee decides to increase the rate -- which it would do in the name of keeping inflation low -- it would likely do so by one-quarter of 1 percent. The new target rate would then be 0.25-0.50 percent. (There was a highly wonky article in The New York Times over the weekend that went into the specific mechanics of how the Fed actually changes this rate.)

The federal funds rate serves as a baseline for other interest rates, since banks aren't going to be inclined to lend more cheaply than they can borrow. So if and when the Fed finally does decide to hike rates, other interest rates across the financial system are likely to follow.

That said, we're talking about a quarter of a percent increase in rates. Such a small change is unlikely to have much of an effect on most Americans.

"The discussion around a lot of this has been talked up to be more impactful than it probably will be," Cullen Roche, founder of Orcam Financial Group, a financial services firm, told The Huffington Post.

There are a few places where Americans might see some movement: in their savings accounts, which might end up paying a small amount more in interest; in slightly more expensive mortgages; and in an uptick in payments for student loans with adjustable rates. However, the emphasis is on "small."

The bigger issue for the economy is what will happen over the long term. It's not just about the first rate hike, but about whether interest rates continue going up, said Josh Bivens, research and policy director at the left-leaning Economic Policy Institute. If the Fed continues to raise rates, that's likely to slow the steady job growth the economy has been seeing in the last couple of years.

Workers are just now starting to gain a little bit of power in the economy, Bivens said. If the Fed leaves interest rates low, unemployment is likely to continue to fall, giving workers more leverage with their employers, who will find fewer and fewer qualified applicants to replace them with. In that case, employers would be likely to do things like raise wages to keep or attract talented workers.

"The real question at hand is, do we follow the example of the 1990s and let the unemployment rate get really low?" said Bivens. "If [the Fed] experiments, we could see some real wage gains for American workers."

But if interest rates rise, the trend could reverse.

"The bigger danger," said Bivens, will be if "this quarter-point increase signals that the Fed thinks that the economy shouldn’t generate lower unemployment."

In that case, he predicted, we'll see continued rate hikes, and power will shift back toward employers.

"The real difference will be a year, a year and a half from now," Bivens said.

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