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Rising rates could have big impact on finances

Updated: May 3, 2013 12:14PM



Originally published: May 20, 2004

Last call! Interest rates are on the rise. The Federal Reserve hasn’t made it official yet, but in the freely traded bond market -- a global market for U.S. Treasury securities -- the numbers tell the story. In the last three months, rates on short-term Treasury notes have risen from 1.5 percent in March to 2.5 percent today. Rates on 10-year Treasury notes are up a full percentage point in recent months to 4.74 percent.

Yes, rates are still historically low, but that upward trend is an important signal for you as a consumer, whether you’re looking for a mortgage, or wondering what to do with your savings.

So what’s behind the rising interest rates story -- and why doesn’t everyone see the danger signals?

The Federal Reserve is the nation’s central bank, and it’s not supposed to be political. But there’s no doubt Fed Chairman Alan Greenspan wants to hold off on rate increases during an election year. His renomination this week to another four-year term as chairman signals that he and President Bush agree on the potential dangers that higher rates pose to our debt-ridden consumer economy.

Where traders turn

But global traders and foreign central banks make daily decisions about where they want to keep their money. They see plenty of alternatives to holding U.S. dollars if they see it falling in value. They can sell dollars and buy other currencies, such as the euro. Last year, the dollar fell by one-third against the euro, cutting the value of reserves of many central banks that hold dollars.

So the banks bought gold -- a beacon for speculation. Or raw materials -- ranging from oil to steel to soybeans to platinum -- just to get their reserves out of dollars. The Fed took notice. Prices of all those dollar alternatives were rising dramatically, until Vice President Dick Cheney made a trip to China and Japan just a month ago. Very few people track the vice president these days, but the markets do.

Ever since his trip to Asia, prices of gold, silver and other commodities have plunged. Big traders wonder if some deal was made. Did the United States promise slightly higher interest rates now -- and much higher rates after the election -- to guarantee future value for the dollar? In return, did central banks of China and Japan promise to stop buying raw materials, whose rising prices encouraged inflationary pressures?

Just wondering. And so is the market. And with everyone wondering, there’s a lot of uncertainty about exactly when interest rates will be officially increased by the Fed and how high they can go. So what does that mean for your wallet?

Those adjustable rate mortgages are enticing, and they make it appear you have some control through limits on how much rates can increase each year. That’s how banks get the risk off their books and onto your balance sheet. When rates rise, they’ll collect more interest. And you’ll pay.

If you’re planning to stay in your home, lock in your mortgage now. Even if you think you might want to trade up to a larger house in the future, why take the interest rate risk? You can be sure that many people who don’t take this advice will be forced to sell their homes when their payments get out of hand.

Savers, on the other hand, must be very careful about locking in rates now -- for two reasons. First, although rates are rising in the bond market, most banks are not passing along those higher rates. Check in at www.Bankrate.com, and you’ll see that rates on one-year certificates of deposit are barely above 1 percent at your neighborhood bank. But those willing to opt for the more-competitive, lower-cost online banks -- still fully FDIC- guaranteed -- can find one-year CDs paying 2 percent or more. That’s how banks pay for bricks and mortar -- by lagging when rates rise.

Second, don’t lock in those rates right now, just because they’re higher than what you’ve been getting. The Fed may be promising only “small” rate hikes now, but after the election the Fed will be forced to face facts. We’re creating more debt every day, and depending on foreigners to buy that debt.

Rates will rise

Eventually, we’ll have to “bribe” them to buy our debt -- by offering higher rates. The only other alternative is to “print” the money -- causing inflation and, of course, higher rates.

Because there’s so much debt at floating rates, this will be painful for those who aren’t prepared. That’s the Savage Truth.

Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.



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