Pumping the Brakes: Impact of the Federal Reserve hiking key interest rate

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HUNTSVILLE, Ala. (WHNT) - The Federal Reserve Board is widely expected to raise interest rates for banks Wednesday.

The Fed is often considered one of the most important economic bodies in the entire world. Raising interest rates? That's considered pumping the brakes.

The economy is driving along, but would anyone would argue it's out-of-control fast?

The expected brake pump from the Fed is more about maintaining speed than it is about slowing down.

The Senior Planning Agency's James Sears notes, "Our economy is growing, although it's not a great rate, about 2.5%. Inflation is still very, very low. As everybody would most commonly say, it's about time. "

 

He sums up, "They wouldn't be raising rates, if our economy was not hopeful."

Still, there must be some concern the Fed is addressing.

Gary Saliba of Saliba Asset Management puts it this way, "You have to surmise that they see some problem, somewhere, that they are trying to forestall."

Some investors who watch the Fed closely say they've got a guess -- private equity.

With that guess comes a worry -- state pension funds.

Saliba summarizes, "In 2013, there were 20 private companies that had a billion dollar valuation. Today there are 150. There's a half-a-trillion dollars of private companies like Uber, that has a ten-billion dollar valuation, that are funded primarily by state pension funds."

So perhaps protecting those pension funds from overexposure is the reason for the brake check.

The analysts we spoke to about the Fed's expected rate hike highlighted one group that will see the most impact.

Sears elaborates, "Zero-interest rates has been what I would call a war on savers, and that means those who'd like to save money and keep it safe, especially like retirees and seniors, have seen no earnings at all from things like CD's and treasury bonds."

Saliba also says, "This will probably affect an older segment of our population, the people that don't buy assets as much but have more investable funds."

But the interest rates the Fed uses and the one you see from your bank don't always move in lock-step.

"A small interest rate increase with the Fed funds rate is not going to mean that the bank is going to immediately raise your CD rates a quarter of a percent or anything like that," explains Sears.

However, there are some types of interest you might expect to follow the fed.

Sears lists, "You might see credit card rates go up just a little bit, payments on credit cards go up a couple of dollars a month, home mortgages will eventually show that."

However, some of the one-off effects of the Fed's decision could stall out of those impacts.

Saliba notes, "You can raise short rates in an indication that you're going to slow the economy and long-term rates actually decline."

The big thing to note is that the Fed appears ready to change course after a decade, so it's time to keep a closer eye on what they're doing -- to make sure you don't get caught off guard if other interest rates change direction.