IMPACT OF THE FED RATE INCREASE / THE VIEW FROM MAIN STREET : Recent Hikes Do Little to Slow Consumer Spending : Financial: Although mortgages are higher, there has been little effect on the cost of most other big-ticket items.
Rising interest rates have caused tumult in housing markets, particularly sparking fears that California’s belated economic recovery could be choked off.
But with the exception of rising mortgage rates, most Americans so far have been relatively unscathed by the Federal Reserve Board’s rate hikes, which began in early February.
Consumers have yet to face sharp increases in loan rates for autos, furniture and other big-ticket items. The economy is still growing. And consumer confidence has continued to increase.
Even savers, the most obvious beneficiaries of interest rate increases, haven’t responded with a large-scale shift of investments into bank certificates of deposit, money market mutual funds and U.S. Treasury securities. Many savers say they want higher yields on those investments before they shift more money.
“These rate increases may not be big enough to do anything but hurt the housing market,” said Sandra Shaber, an economist with the WEFA Group in Bala Cynwyd, Pa.
Economists argue that by slowing the rate of the economy’s expansion now, the Fed is demonstrating its resolve to prevent future rises in inflation--which would trigger even sharper and more dramatic rate increases. It’s a matter of “taking the medicine now as a preventive measure,” said David Lereach, chief economist for the Mortgage Bankers Assn. in Washington.
If the medicine works, economists say, everyone wins because the economy continues a sustained, moderated growth.
Even the housing industry may ultimately gain, Lereach said: “Rates that gently rise now will moderate the economy’s growth and ultimately we’ll enjoy a longer run at expansion. The whole point is to get a soft landing of the economy.”
Whether a soft landing is achieved remains to be seen, because the cumulative impact of the rate hikes--particularly Tuesday’s latest round--has yet to be fully felt. Rates could rise so much further as to pinch many consumers and slow their demand for houses, cars and other purchases.
So far, however, consumers have shown little interest--or concern--over the rising rates.
One reason, economists say, is that the rates in question have not really increased greatly. Since early February, the Fed has increased the target rate banks charge each other for overnight loans from 3% to 4.25%. But rates on auto loans, credit cards and other non-mortgage borrowing have not risen as much.
Another reason is that the increases so far have been widely expected, and consumers may be braced for still additional rate hikes.
Finally, bankers and investment experts say, consumers and investors alike have become more sophisticated about the economy and are less likely to panic at individual movements.
Perhaps most surprising has been the ho-hum response from savers--an attitude that strongly suggests a new breed of individual investors has become far more comfortable with the often volatile fluctuations of the market and far more accepting of investment risks.
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Take, for example, James Von Lossow, a 66-year-old retired Seattle resident who relies on his investments for much of his living expenses. He certainly can’t afford to be a gambler. But, he added, he also can’t live on what bank certificates of deposit or other government-guaranteed investments currently pay.
So he’s accepted some risk when investing his retirement portfolio to gain higher returns. “You need to be more flexible these days,” he said. “You either have to give up the security of guaranteed investments or learn to live on less income.”
In a Money magazine survey last year, 60% of respondents said they were taking greater risks with their funds today than in 1991--many with no small amount of fear. “Two years ago I had two-thirds of my money in bank CDs,” one respondent said. “Now I have zero in banks and 100% invested in the market--with my fingers crossed.’
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