It's Discount Week! 🎁 Pick up new Marketplace gear at a discount when you donate today! Get My Gear!

Should we be worried about rising interest rates?

Sarah Gardner Jun 21, 2013
HTML EMBED:
COPY

Should we be worried about rising interest rates?

Sarah Gardner Jun 21, 2013
HTML EMBED:
COPY

Now that summer’s here and the weather’s heating up, so are things at the Federal Reserve in Washington. Don’t exit this webpage just because you read those two sleep-inducing words: Federal Reserve. Yes the Fed can be boring, but it also happens to affect just about everything in our personal financial lives. That’s because what goes on at the Fed doesn’t stay at the Fed. It controls interest rates and that, of course, affects how much we pay for things. Everybody was atwitter about what Chairman Ben Bernanke would say at this month’s meeting.

So what do we know? Well, we don’t need Mr. Bernanke to tell us that interest rates are going up. The average 30-year mortgage rate is now around 4 percent — that’s up from 3.25 percent just a few months ago. And with the economy getting stronger, interest rates are likely to keep rising. Ilyce Glink is a personal finance journalist and author. She’s here to explain what it all means for your personal finances. So are interst rates going to go up from this point forward?

“I don’t think it’s a straight line, but I do think [interest rates] are going to go up,” says Glink. “You can’t stay where we are now. We’re buying our way into this rate. The Fed has been pouring money to the tune of $85 billion a month into the markets to artificially depress these interest rates. They’re doing it to try and stimulate the economy. The only reason we’re here with these interest rates — which again have been at historic lows — is simply a reflection of how awful our economy has been and still is for the larger, general public. Once the economy starts getting better, there won’t be a need for us to be here.”

Interest rates going up can be good thing for some people and a bad thing for others. So who are the winners?

“The only people who win might be the entire senior population and anybody who lives off of fixed-incomes securities. They’ve been living off of zero and that’s really a hard place and they’re eating into all of their capital, which is nothing that they’ve prepared for and it’s going to cause some very serious problems for us down the line when they run out of money altogether,” says Glink.

Who are the losers?

“The somewhat losers are people who’ve been buying property or wanted to buy at rock bottom interest rates because it allows them to basically buy more house for the money. That, in conjunction with still depressed housing prices, means that even though they’ve gone up a little bit — we saw that number rise again this week — it still means affordability is at an all-time high. The thinking that mortgage interest rates can go up to even 5 or 5.5 percent for a 30-year fixed loan before the housing market starts to get into trouble. I don’t know if that’s true because there’s a psychological thing going on here, but it might be,” says Glink.


Bernanke’s tape: Who’s afraid of rising rates?

Fed chair Ben Bernanke says rising interest rates are a good thing. But good for whom, exactly?


We’ve hard from some listeners on our Facebook page and in our mail that they’re worried about rising rates on mortgages and refi’s, so they’re rushing to get their loans in place before rates skyrocket. Is that rational? Should we be panicking?

“There’s no need to panic. We’re not going to see mortgage interest rates jump to 11 percent by December. It’s not going to happen. We’re not even going to see them go up, I don’t think, to 5 percent because the Fed is pushing hard and buying it down. What you saw happen over the last couple of weeks is that investors are starting to feel like maybe there’s some other opportunities around the world and they’re pulling out of the market. And by necessity — supply and demand — that means we’re going to see interest rates rise a little bit and that is what’s happened,” says Glink.

The stock market looked a bit bumpy after the Fed meeting on Wednesday. What’s the correlation between rising interest rates and the stock market’s movements?

“The stock market and interest rates typically move in inverse directions. So as the Fed has been buying these rates and pushing them down, we’ve seen the stock market bounce back from its low. Remember how low it really was? It was like at 7,000 in 2009. Now we’re flirting with 15,000, above or a little below. That is a huge comeback entirely driven by interest rates. So the thinking there is companies spend less with their interest rates to borrow, so they’re going to invest in the business, it’s going to be cheaper, the profits are going to be bigger. We have seen some of that happen. So the stock market’s gone up. When interest rates rise, the stock market should go down. I say ‘should’ because nothing’s ever certain,” says Glink.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.