Preparing For The Fed's Planned Interest Rate Hike

Transcript

AUDIE CORNISH, HOST:

Before yesterday's wild market ride, a lot of people expected that the U.S. Federal Reserve would finally raise interest rates next month. Today the bets are all over the place. Some investors think it could still happen before the end of the year, others are banking on the spring. Either way, it's not too early to start thinking about what that will mean for you. To dig into this a bit, we're joined by Megan Greene. She is managing director and chief economist at Manulife Asset Management. She's joining us from Boston.

Welcome to the program.

MEGAN GREENE: Thanks for having me.

CORNISH: So first we want to remind people that we've been living through this extraordinary experiment, right? I mean, 0 percent interest rates. What should the average person be expecting when that experiment ends?

GREENE: Well, when that experiment ends and rates start going up, people will have a harder time servicing their debts. So some borrowers will have an even harder time than others because some debt is pegged to short-term rates, which are very closely linked to the Fed's rates. Other debt is pegged to the long-term rate, which is less related. So I think that the biggest losers from a Fed hike are really credit card debt holders. Most credit cards are variable-rate cards, so those rates are pegged to the Fed's policy rates. And also, those who have stumped up their houses in exchange for a loan, they'll feel the impact of a Fed hike. They'll have a harder time servicing their debt as well. Things like fixed mortgages, car loans and federal student loans are pegged to a long-term rate, so the impact of a Fed hike won't feed through to them quite as immediately.

CORNISH: You're talking about a lot of important loans in people's lives. So how should they be approaching financial decisions right now?

GREENE: Well, I think that people holding - sitting on a lot of credit card debt should certainly look to start paying it down because credit card debt is the most expensive kind of debt, for the most part, and they'll feel the impact of the Fed hiking rates most immediately. So I think that they should be sort of the most on guard for what happens when a Fed rate hike comes. Also people who've stumped up their houses to get a loan should be ready to start trying to finance that loan or trying to pay it down so that they don't get caught out when the Fed starts hiking rates.

I should mention that when the Fed does finally start hiking rates, I don't think it will do so very quickly. I think we'll see a, you know, a very slow and episodic rate hike in rates. So we'll see the Fed hike rates by 25 basis points then they'll sit there at that rate and wait a couple of months, see what the impact is on the real economy, maybe hike another 25 basis points. That's something we've never seen the past in the U.S. When the Fed hikes, normally it hikes, you know, every single month in a row for a long period of time, so it's very systematic. I don't think we'll have that this time around. The hike will be slower and it will be based on the impact on the real economy. So consumers should at least feel comfortable about that. They won't get a huge surprise immediately.

CORNISH: And I want to take a step back here also because people may not remember how high interest rates were not too long ago, right? I mean, even when rates go up, it's still going to be worlds from where we were.

GREENE: That's right. I think that when rates go up, they'll go up very slowly, as I said before. But I don't think that we can expect the normal rates that we've had before for a number of years. So in the past, 10-year yields in the U.S. have typically been around 4 percent. We're not going to be anywhere close to that over the next five years, so we can expect rates to remain really low for a long time.

CORNISH: And, Megan Greene, before I let you go I want to ask your guess about when you think the Fed will act, when rates might go up?

GREENE: Well, I think that the Fed will probably wait as long as possible to start hiking rates, but I think that they'll feel some compulsion to hike rates in December of this year. The Chairwoman, Janet Yellen, has said a number of times that the Fed would like to hike this year, and so if the Fed doesn't then that could really hurt the Fed's credibility. And if the central bank doesn't have any credibility, it cannot do its job. The risk to that, I think, is that the Fed will wait even longer and we won't see a hike until next year. If you ask me what I think the Fed should do, they should definitely wait until next year. There's only one economic indicator that suggests that the Fed should start hiking rates, and that's the unemployment rate. But every other indicator suggests that, actually, the Fed should hold off.

CORNISH: That's Megan Greene, managing director and chief economist at Manulife Asset Management.

Megan Greene, thank so much for speaking with us.

GREENE: Thanks for having me. Transcript provided by NPR, Copyright NPR.