What will an interest rate hike mean for you?

The New York Times has described it as “the most anticipated economic event of the year” and investors have been talking about it for months: for the first time since the financial crisis, the US Federal Reserve looks set to increase interest rates.

All the headlines and speculation might leave the layman wondering about what this long-awaited change of policy means. The short answer: not much, at least for the time being. Those were the findings of a recent Gallup poll that asked investors what a rate hike would mean for them personally. Although some (16%) thought higher interest rates would be good for them, and slightly more (29%) said they would be bad, the majority (54%) concluded they would not make much difference.

As Gallup’s analysis of the results noted, higher interest rates are less likely to affect investors or savers, but others could bear the brunt: “Higher interest rates are more likely to negatively affect Americans who intend to borrow or who are paying off an adjustable-rate home mortgage or other loan.”

That said, even if you have a mortgage, a student loan and were just about to buy a car on credit, you still don’t need to worry just yet. While increased interest rates in theory mean higher borrowing costs, the Fed’s policies don’t have as much of an influence on your day-to-day as the headlines might make you think: “The federal funds rate, central as it is to the making of monetary policy, has only a wobbly effect on how banks and other financial institutions price certain loans and savings vehicles”, the New York Times pointed out.

Analysts expect that most people in the US will feel very little impact from the change of policy throughout 2016. But by 2017, “more consumers will be feeling the pinch,” says Giancarlo Bruno, Head of Financial Services Industries at the Forum. “We’ve got used to historically low interest rates, but in the long run, the cost of borrowing will increase.”

In emerging economies, though, the situation is more worrying. Already this year, anticipating an increase in US interest rates, investors have withdrawn $500 billion from emerging markets – the first time since 1988 that capital outflows have exceeded inflows. According to the Financial Times, that trend may get worse: “Pressure on emerging market currencies is set to intensify, more capital may flow out to safer havens, and debt service costs may rise for thousands of companies that have borrowed in US dollars.”

Concerns about the wider global repercussions of an interest rate hike led the Fed to postpone the move back in September. For some experts, three months later, the risks for countries such as South Africa and Brazil are still there: “Many emerging markets have particularly good reason to be worried,” Ivana Kottasova of CNNMoney said today.

Have you read?
How does QE reduce long-term interest rates?
Why we should look again at long-term US interest rates
What history teaches us about house prices and long-term interest rates

Author: Stéphanie Thomson is an editor at the World Economic Forum

Image: A trader works on the floor of the New York Stock Exchange shortly after the opening bell in New York, August 18, 2015. The Commerce Department report on Tuesday added to solid payrolls, retail sales and industrial output data in suggesting the economy got off to a strong start in the third quarter. The steady flow of upbeat economic reports has bolstered views that the Federal Reserve will raise interest rates in September. REUTERS/Lucas Jackson