Federal Reserve
The Federal Reserve it can be argued has done a great job of propping up the economy during the Great Recession with its easy money policies led by Quantitative Easing 1, 2 and 3. However, the growth in the stock market and the low interest rate on our ballooning debt is artificial as a result of the Fed's policies. Dialing back of their latest bond-buying program, is the finesse move confronting the Fed for the next five years. If the Fed moves too fast, it could cool the recovery. If it moves too slowly, it could fuel asset bubbles or excessive inflation. In December, the Fed decided to trim its bond buys to $75 billion a month from $85 billion.

How the Fed’s Interest Rate Increase Can Affect You

12/14/16
from The New York Times,
12/14/16:

The Federal Reserve raised its benchmark interest rate on Wednesday for just the second time since the 2008 financial crisis. Economists talk a lot about the impact this will have on markets, but what about everyday consumers? The Fed’s decision can affect the cost of housing, cars, student loans and even the interest on your credit card — though not all necessarily right away. And when the Fed raises rates, all sorts of other expenses eventually tick up. The move is part of what will be a slow, upward climb for what’s known as the federal funds rate. Banks are ordered by law to have a certain amount of money in reserve, so they typically make overnight loans to each other to keep those balances up. The federal funds rate is the level of interest that applies to those short-term loans. Because the rate has been close to zero since 2008, as part of the Fed’s strategy to bring the nation out of a recession, there’s hardly anywhere for it to go but up. As the economy improves and President-elect Donald J. Trump unveils his stimulus package, economists expect rates to rise steadily over a period of years. “The bottom line, ostensibly, is that the economy is getting stronger,” said Dean Baker, co-director of the Center for Economic and Policy Research. “Nobody in their right mind would say, ‘I’d rather have higher unemployment and lower interest rates.’ Nobody wants to pay a higher interest rate, but I think that’s an easy choice for most people.”

Mortgages.

The average interest rate on a mortgage this month is 4.3 percent, according to LendingTree, and the average loan on a 30-year, fixed-rate mortgage is worth about $237,000. If the borrowing rate were to rise by, say, another percentage point in the coming year, this would mean an additional $138 a month on the average mortgage — leading to nearly $50,000 in added interest over the duration of the loan. As mortgage rates go up, people are a little less likely to buy a house, and those with fixed-rate mortgages are less likely to refinance (because they probably will not end up with a better deal).

Credit card rates The annual percentage rate on your credit card can be anywhere from 15 percent to 20 percent — much higher than the interest rate on a mortgage or a car loan. An uptick in the Fed’s interest rate might cause your credit card’s A.P.R., if it’s variable as opposed to fixed at a specific rate, to bounce by one or two percentage points. The effects of that can be larger than they may initially seem, in part because the interest compounds.

“If you’re accumulating credit card debt for a year,” said Markus K. Brunnermeier, a Princeton economist, “moving from 13 percent interest to 15 percent is a much bigger deal than moving something from 1 percent to 3 percent.”

Student loans Rates for student loans, like other forms of borrowing, are at a relative low. But as the Fed’s rate rises, that will change for those just starting to think about paying for college.

“Students taking out new debt will be looking at higher payments,” Dr. Baker said, adding that he expected rates could rise by one or two percentage points in the next few years.

Car loans Rates for car loans, too, are already climbing in response to the Fed’s expected move. Auto loans tend to last only a few years, so there is still time for car buyers to get ahead of the curve. “If you’re thinking of buying it now or in two years’ time, you should buy it now,” Dr. Brunnermeier said.

Housing rentals What about renters? An interest-rate increase may also affect them — just not as directly. Higher rates mean that landlords must pay more to purchase and renovate their properties, so in the long run, those are costs they could easily pass on to renters.

Wages

And with the labor market improving, workers’ wages could rise at about the same time as rent prices, said Stephen D. Oliner, a resident scholar at the American Enterprise Institute and former member of the Federal Reserve Board. “It’s possible that with their wages rising, people will be able to keep up with the higher payments on their rents,” he said.

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