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More rate hikes on card: Households to feel the pinch in the long term

The Federal Reserve hiked the key interest rate by 25 basis points to the range of 1.50-1.75% this week, when policymakers met for the first time after Jerome Powell took the reins of the apex bank. All the eight members voted in favor of the first of three rate hikes proposed for this year.

Buoyed by the brightening economic outlook, with risks to growth perceived to be balanced in the near future, the Fed hinted at more aggressive monetary tightening next year and beyond. The policymakers are looking for a faster growth of 2.7% this year than 2.5% they had forecast last year.

Picture Courtesy: Wikipedia

In the near term, the economy is expected to benefit from the upbeat job market, and the tax cut rolled out by the Trump administration last year. Inflation is seen moving further up, and the price growth appears to be on track to stabilize at the Fed’s target in the medium term, before crossing the 2% mark next year.

While the positive outlook might prompt the Central Bank to take a more hawkish stance in future, economists believe the bank would be cautious enough not to hamper the growth momentum by hiking the borrowing rates too sharply. It needs to be noted that though unemployment improved to historical lows recently, there wasn’t a corresponding increase in wages.

So, sluggish household spending in the absence of further wage increases could result in a widespread economic slowdown. Economists are of the view that the long-term impact of the rate hike will be significant.

The Fed hiked the key interest rate by 25 basis points to the range of 1.50-1.75%

Meanwhile, higher interest rates will have a mixed impact on the personal finances of Americans. Those who have taken mortgages and car loans on variable interest rates will be the most affected.

Though families holding fixed-rate credit cards and loans will be relieved from paying more for the time being, in the long term such credits, especially home loans, will also become dearer. That would likely have a ripple effect on the realty sector, where higher mortgage costs will dent the demand for residential properties.

The rate hike regime, which was launched in 2015, puts the Central Bank on track to bring the unusually low policy rate back to the pre-crisis levels.

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