The Fed And Your Finances

June 30, 2004 -- Many consumers may be panicking at the interest rate increases set in motion with today's rate hike by the Federal Reserve.

Yet the Fed has said it will raise the federal funds rate — which serves as the benchmark for all other interest rates — at a "measured" pace. And the impact of higher rates may be further muted because rates are starting from such a low point.

Now, the federal funds rate is at 1.25 percent, still its lowest level in decades. But longer-term, interest rates are forecasted to increase to 2.25 percent by the end of 2004 and 3.75 percent by year-end 2005.

Changes in interest rates can affect the overall economy, with higher interest rates being considered "bearish," while lower interest rates are "bullish."

Essentially, higher interest rates tend to slow economic activity as they raise borrowing costs for consumers and businesses, while lower interest rates stimulate economic activity.

Either way, interest rates influence the sales environment. In the consumer sector, the rate at which homes or cars are purchased tends to slow as interest rates rise. For businesses, particularly those with high debt loads or those which have to finance high inventory levels, interest rates are a significant factor as the interest cost has a direct impact on corporate profits.

Interest Rate Impact

With the Fed having raised interest rates, the impact on consumer loans will vary. Many consumer loans have already accounted for the rate increase. For the consumer, this means rates for car loans, mortgages and home equity products are on the way up.