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VOL. 130 | NO. 244 | Wednesday, December 16, 2015

Fed Hikes Rate, Finance Pros Expect Minimal Immediate Impact

By Andy Meek

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Borrowers and savers aren’t likely to see an immediate impact from the historic move Wednesday, Dec. 16, by the Federal Reserve to raise interest rates by a quarter point for the first time in almost a decade, according to several Memphis-area financial industry professionals.

Nevertheless, the implications of the rate hike are profound, with the central bank setting the stage for an inexorable reshaping of the local, regional and national economies.

The Fed voted unanimously to move its rates, which had been near zero for seven years up to a range of 0.25 percent to 0.5 percent. The Fed also said in its announcement that it anticipates making only “gradual” increases going forward.


Quick takeaways

There are a mix of short- and longer-term repercussions of the central bank’s decision for both borrowers and savers. John Phillips, chief investment officer and principal with Red Door Wealth Management in Memphis, says his firm has been breaking things down for clients.

The immediate impact of today’s decision for borrowers: “variable rate loans which are tied directly to the Prime Rate will increase immediately.” (The two main variable debts consumers carry are credit cards and home equity lines of credit.)

Any effect on fixed-rate loans will be delayed, and while mortgage rates are more tied to 10-year Treasury notes, Phillips said Red Door also expects “modest increases” there, too. As for auto loans, while rates for those might tick up slightly, Phillips doesn’t expect them to do so in a way that puts a dent in buying behavior.

As for savers, “you should see a slight bump in rates for money market funds and corporate bonds,” Phillips continues. Banks, though, aren’t likely to hike the rates they pay to savings account holders in any significant way as a result of the Fed news, as those are more tied to market forces than to the Prime Rate.

“Generally speaking, the consequence of rising rates to the consumer – assuming they finance their purchase – is diminished purchasing power,” said Duncan Williams Asset Management president Demetri Patikas. “In other words, if I buy something in the new, higher rate environment, more of my payment now goes toward interest expense. That said, all the talk from the Fed is for a minimal hike in rates and therefore should not have that big of an impact on the economy.”

Likewise from Scott Poore, director of investment solutions at Wunderlich Securities Inc.:

“As with any move by the Fed or any change in policy, there will be positive effects and negative effects. On the negative side, individuals (borrowers) will be paying higher costs for loan services.”

In other words, since it costs more to borrow money in a higher rate environment, banks will mostly likely pass that cost of borrowing along to consumers. On the plus side, Poore adds, banks should become more profitable as their margins on loans made to borrowers get fatter.

Today’s rise, it should be noted, also doesn’t necessarily portend a smooth up-and-to-the-right trajectory. It goes without saying, but what goes up can also go down, and if the economy worsens, the Fed can just as quickly hit the brakes on rate rises or even reverse course at future meetings.

To also put today’s news into some historical context: the last time the Fed raised rates, back in June 2006, Apple had not yet introduced the first iPhone.

PROPERTY SALES 53 210 10,146
MORTGAGES 53 214 11,160
BUILDING PERMITS 245 474 22,646
BANKRUPTCIES 271 271 6,490