The U.S. Federal Reserve is almost certain to hike interest rates Wednesday to the highest level in a decade: 1.5 to 1.75 percent. For retirees like Martin Nicholes III of Asheville, N.C., the bigger rates can't come fast enough.
“The low interest rates are killing my retirement,” Nicholes said.
He exited stocks after the financial crisis in 2008 and 2009, moving most of his money into cash and bonds. He needed to feel safe with his finances, especially after losing his engineering job during the Great Recession and being forced into early retirement. But for the past decade, he's earned almost no interest on the money in his savings account. Even CDs — the “certificates of deposit” that tie up money for a few months in exchange for a bit more interest — are currently paying stunted amounts. The best 1-year CD rate is just higher than 2 percent, according to Bankrate.com, but the average is just 0.5 percent. That's well below the 5 percent rates Nicholes was used to from the pre-crisis era.
“The low interest rates have been really hard for my generation, the baby boomers,” said Nicholes, who is 70. “We're just drawing down [our savings] faster than we thought.”
Higher rates are welcome news for savers, but they can be problematic for people and companies that have a lot of debt — or want to take on more debt. As the Fed boosts rates on financial institutions, banks turn around and lift interest rates on credit cards, auto loans, small business loans and home mortgages. Credit card debt is at an all-time high, according to the consumer credit reporting company Experian, and there are a record number of Americans with auto loans, according to Fed data. Credit card debt, in particular, often comes with a “floating” or “variable” interest rate that rises when the Fed hikes rates.
The Fed faces a delicate challenge over how quickly to raise rates this year and next. If it hikes too quickly, it could cause the stock market and U.S. economy to slow or even tank. But if it lifts rates too slowly, it could cause the economy to overheat, a scenario that could trigger an even uglier bust.
The Fed is also under new leadership: Jerome H. Powell, President Trump's appointee, took over as Fed chair in February. Wednesday will be his first time overseeing a Fed rate announcement at 2 p.m. That's followed by a news conference at 2:30 p.m., when he will have to explain the Fed's latest assessment of how the U.S. economy is doing and what's likely to happen for the rest of the year. Wall Street will be listening closely to get a better feel for what Powell thinks the economy needs: more rate hikes or fewer?
“We are forecasting four rate hikes this year. This seems to be the most sensible course, raising rates at each of the four regularly scheduled Fed news conference meetings,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
What the Fed does has a wide-reaching impact beyond Wall Street. Higher rates are supposed to be good news for people like Nicholes who have a lot of money in savings. As the Fed raises rates, banks typically turn around and give savers a better return, but so far banks have been slow to bump up their savings account and CD rates.
“It's been slowly but surely getting better for savers,” said Mark Hamrick, Washington bureau chief at Bankrate.com. “As rates rise, expect to see further interest in people putting their money in the bank.”
The increase is likely to be small this time, but as the Fed does more hikes, savers rejoice and borrowers feel the pain. The average credit card is charging a 16.4 percent rate now, according to CreditCards.com, up a percentage point from a year ago. That rate could easily jump another point in the coming year, meaning people in debt would have to pay back more interest on the loan.
The focus Wednesday will be on any signals Powell gives about what's likely to happen in the next two years. Four rate hikes in 2018 would put interest rates at 2.25 percent to 2.5 percent by the end of the year. That's still very low by historical standards (interest rates were over 5 percent for much of the boom years in the late 1990s), but Americans haven't seen anything much above zero for a decade.
The Fed was forced to cut interest rates to historically low levels during the Great Recession in an effort to revive the U.S. economy and prevent more banks from bankruptcy. It was an unprecedented move, but now the Fed is facing an equally unprecedented task: getting America comfortable with more normal interest rates again after years of easy credit and fast money.
The debate is even more complicated after Trump's tax cuts and the roughly $500 billion Congress plans to spend. All of this additional money is likely to cause faster growth in the coming months, potentially forcing the Fed to raise rates faster. Then there's also Trump's push for more tariffs. While the impact of the steel and aluminum tariffs is expected to be modest, Trump is expected to announce hefty tariffs on some Chinese imports soon, potentially launching a harmful trade war.
In December, the Fed predicted the U.S. economy would grow at 2.5 percent in 2018 and that the Fed would hike interest rates three times. Now there's a growing chorus of economists and traders who believe the Fed will indicate Wednesday that the economy will expand even faster and the Fed is likely to raise rates four times.
Economists largely agree the U.S. economy — and the world economy — is looking very healthy right now. Wednesday's rate increase would be a signal of continuing economic strength: Unemployment is at the lowest level in nearly two decades and growth is showing signs of a pickup, giving the Fed a cushion to lift rates without too much harm.
But Wall Street traders — and many savers and borrowers on Main Street — aren't just thinking about conditions today. They are pondering what's ahead later this year and next as they decide where to invest their money and whether to take out loans.