Fed poised for rate hike; then what?

Federal government, $13.0 trillion

Non-financial businesses, $12.2 trillion

Home mortgages, $9.4 trillion

Foreign-owned debt in the U.S., $3.2 trillion

State and local governments, $3.0 trillion

Other consumer debt, $2.1 trillion

Student loans, $1.3 trillion

Total debt, $59.0 trillion

Note: Debt totals are as of the first quarter of this year. Debt total includes about $0.8 trillion owed by non-profit organizations

Source: Federal Reserve

The smart money — in fact, nearly all the betting money — is on the Federal Reserve lifting the benchmark interest rate off the floor this week.

The expected move will come after years of anticipation and trepidation. Several times now, speculation of a hike set the stock market swooning and some experts howling about the effect on a still-wobbly economic recovery. When it finally happens, as is expected at the Fed meeting Tuesday and Wednesday, the move could seem almost anticlimactic.

For one thing, the rate the Fed sets — for short-term lending between banks — doesn’t automatically change consumer or savings rates. But it sets a direction other rates generally follow.

For another, “Nobody believes the Fed will move up rates very quickly,” said University of Georgia economist Jeff Humphreys. The Fed rate has been near zero for years as part of a policy to goose the recovery, and this month’s initial increase is expected to lift it just a quarter-point. Another quarter-point bump might come next year, Fed-watchers say.

Jeff Day, 54, a longtime salesman at Nordstrom in Perimeter Mall, said most of his personal debt is at fixed rates so he is isn’t worried about bills going up in the short run.

“The main thing is I hope it doesn’t affect my 401(k) retirement,” said Day. He worries stocks might take a hit and mall traffic might decline. The Fed interest rate “hasn’t gone up in so long, I can’t remember,” he said.

So how will various people and parts of the economy be affected? We take a look:

CONSUMER DEBT

Consumers account for almost one-fourth of the nation’s $59 trillion total debt load, according to the Federal Reserve. For many, higher interest rates means higher payments, which could crimp spending.

“Debtors are going to be the losers,” said Humphreys.

People with variable interest rate loans, such as credit card balances or home-equity lines of credit, will see rates rise soonest, but eventually fixed interest rates on car loans and mortgages will also rise as people take out new loans.

“The credit card customer probably feels this more than anybody else,” said Chris Marinac, managing principal at FIG Partners, an Atlanta bank advisory firm. Those borrowers’ rates — typically around 12 percent now — will rise almost in lock-step with the Fed’s rate increase moves, he said. Such “revolving” credit accounts for about 6 percent of household debt, according to Federal Reserve data.

The bright side, Humphreys said, is that many households have paid down debt since the Great Recession, and those with fixed-rate debt are paying historically low rates.

Total consumer debt across the nation remains below its 2008 peak of nearly $13.9 trillion. “We’re actually in pretty good shape to withstand these interest rate increases,” he said.

THE STOCK MARKET

With the benchmark rate so low for so long, the market has been the only growth game in town for many investors, and it’s done well: both the Dow Jones Industrial Average and the S&P 500 have more than doubled.

Virtually each recent hint of the Federal Reserve raising rates has sent stocks into a swoon, followed by a rebound when the Fed backed away.

Yet the pattern may be different this time, said economist and investment adviser Emily Sanders, managing director of United Capital’s Atlanta office.

Investors now have more confidence in the economy. Moreover, the constant will-they-or-won’t-they routine has created what the stock market hates — uncertainty. A Fed rate increase might be seen as removing doubt, Sanders said.

“There has been so much uncertainty and anticipation as to when the rate would go up and that uncertainty has been holding things back,” she said. She even thinks a hike this week will spark a “relief rally,” though she added: “I’m not saying a big rally.”

Plenty of factors, led by plunging oil prices, are driving market volatility right now. That could also mute the effect of a rate hike. Some market-watchers also say the market won't be moved as much by what the Fed does this week as by what it says about rate hikes in the future.

HOUSING

Interest rates and housing — still a key sector in metro Atlanta even after the bust — are thought to be joined at the hip.

Mortgage rates aren’t directly pegged to the benchmark Fed rate. Instead they ride along with the yield paid on 10-year Treasury notes. That note reacts to the stock market, inflation and the overall economy — all of which can be influenced by Fed rate policy. With all those filters, it may take time for the effect of a rate hike to become clear.

For non-cash buyers, any significant change in interest rates affects affordability and can knock them out of price ranges or out of the market entirely. On the other hand, experts say the fundamental drivers are still job growth, wage growth and inventory.

In the current environment, a rate hike could actually be good news for housing if it pushes both buyers and sellers off the sidelines, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

“There’s a big body of fence-sitters who will come out to buy houses,” he said.

Svenja Gudell, chief economist for real estate website Zillow, said a hike has hung over the market for so long that most fence-sitters should have jumped by now. She doesn’t expect much change — negative or positive — because prices are not out of line with consumer incomes in most markets, including metro Atlanta.

“There are only a few places where interest rates will affect the market,” she said. “Atlanta is not one of those markets.”

BANKS

Banks are more sensitive to Fed moves than just about any other type of business. They make most of their money by collecting customers’ deposits and loaning that money out at higher interest rates.

That’s been a tough way to make money in recent years. Since the Great Recession, the interest rate spread between banks’ loans and their deposits — their interest margins — have gradually shrunk to the lowest level in decades.

When the Fed raises rates, industry insiders expect banks’ profits to get a boost, allowing them to lend money at higher rates.

Some banks will benefit more than others, said Marinac, the expert at FIG Partners. Atlanta’s SunTrust Banks and other big banks with large portfolios of business loans tied to variable interest rates will see profits rise faster than most small community banks that have more fixed-rate loans.

But he does not expect dramatic effect, because the Fed’s initial hikes will be small and will be followed by breathers to see how the economy responds.

BUSINESS INVESTMENT

Companies small and large have to borrow to buy equipment, hire more employees, and keep the lights on and workers paid when there are gaps in cash flow. The higher its borrowing costs, the less money a company is likely to spend on growth – and the more likely it could run into trouble paying off debt.

When the Fed lifts the benchmark rate, the prime rate, the interest rate banks charge their most credit-worthy customers, generally rises as well, also affecting other loans pegged to the prime rate.

Big corporations can usually absorb small rate changes. Small companies without deep financing sources may have to turn to other options. They range from the Small Business Administration, which backs some bank loans, to non-traditional lenders such as Atlanta-based Kabbage, a web-based company that also focuses on small businesses.

Kabbage is attuned to anything that raises costs of capital, said Victoria Treyger, the company’s chief marketing officer, in an email, but: “A small hike will not impact us right now so we do not expect any impact on Kabbage loans.”

Another lender to young and small businesses, the Georgia-based non-profit Access to Capital for Entrepreneurs (ACE), said it is already seeing borrowing costs tick up. The group currently has about $12 million in outstanding loans to 300 borrowers including trucking outfits, day-care centers, private schools, accounting firms and restaurants.

Yet the expected change in rates will be small enough to handle, chief lending officer Sandy Headley said. “Overall any increase in the rates is going to have some impact, but I don’t think it would present a real problem.”

SAVERS

Often lost in the concern about spurring the economy have been those who depend on a steady rate of return and minimal risk. Such rates have been at painfully low levels under recent Fed policy.

“People who are in cash are earning essentially zero,” said Sanders, of United Capital.

Savers’ returns on money market and CD accounts will likely begin rising after a Fed hike — but slowly, experts caution.

Some government payments are capped, which for retired people especially puts a premium on getting the best rate of return on private investments, Sanders said. For example, there will be no cost of living increase for Social Security recipients next year.

“So if there is an increase in savings (returns), that might offset the fact that Social Security is not going up.”

If inflation heats up, the squeeze on retirees gets worse.

“Inflation has been pretty low, but still, you need some positive return from cash savings,” Sanders said.

A Fed move would be a step — though a small one — in that direction.

STUDENT DEBT

Metro Atlanta is loaded with universities, and with students using loans to attend them.

Interest rates on new federal student loans — the most common type — are tied to rates in the financial markets and are reset annually for new loans. So they’d likely rise after a Fed hike, though not right away and not by much initially.

Higher debt costs could be a drag on the economy. Many economists say millennials’ heavy college debt has slowed their buying of buy homes, autos and other goods. These 20- and 30-somethings account for the bulk of the 43 million Americans with college debt averaging $27,000, according to the Federal Reserve.

Tim Renick, vice provost at Georgia State University, isn’t particularly worried about the immediate threat of rising rates. Most current loans have fixed interest rates, and borrowers don’t have to start repaying while they’re in school.

But longer-term, a trend toward higher rates will put more financial pressure on many, he said. About 80 percent of Georgia State’s students have loans averaging $20,000, and about 60 percent come from low-income families.

“These are students who will be most impacted by interest rate increases,” he said.

That could spur a new push in programs, already used at Georgia State and elsewhere, to offer grants to low-income students and to get students to graduation more quickly.