What Do Rising Interest Rates Mean To You?
Why it is important: Interest rate is the cost of debt. If the cost rises to service debt in a country where trillions of dollars of debt exists, there could be problems you need to know about.
The talk on Wall Street is that rising interest rates is bad for the stock market. What about for the consumer?
As interest rates rise so do new mortgage payments. You would automatically think that this would be a bad thing for the real estate market. Well, it is a little more complicated than A+B=C. For some of the depressed markets in the US, it will only get worse because rising rates will be a negative thing. However, for markets across the US where there is great demand and limited supply of homes, higher rates probably will not be that big of a deal.
As of this morning, you can still qualify for a new car rate of 2.49% to 3.24% depending on the term of the note at www.penfed.org. Car buying is such an emotional decision; higher payments due to higher interest rates can be rationalized away. Then there is the lease factor. Leases are still competitive. I think that interest rates would have to increase to over 5% to make the consumer pause. Thus, we shouldn't see this big of a negative effect.
Consumers are already paying outrageous interest rates in many cases. Since all credit cards are variable rate cards, the interest rates will go up along with rates. Since most consumers don't even know that they are paying outrageous rates, it shouldn't have as big of an effect on them at these level of interest rates.
The Stock Market
I think that there will be an initial shock to the markets with higher rates. However, it comes down to how fast and how high they rise. That is the unknown. Fast rising rates could send this market straight into a bear market. It would be like a pin popping the debt bubble.
Remember that interest rates represent the cost of debt. In a country awash with debt and the cost of that debt going up even marginally could be challenging for an economy that is already walking a tight rope. If the economy goes into recession as some interest rate indicators indicate could happen, all bets are off for the above. It comes down to one factor. With higher rates, can the economy still maintain a marginal growth factor?
The saving grace is that interest rates even today are still at historic levels. However, we are in uncharted waters. This definitely adds a wildcard into the future for all areas of the economy. It is never what you can see that causes the problems. It is only what pops up that no one anticipated that creates the problem. In uncharted waters, that is a problem.