The Federal Reserve, after nearly seven years of near-zero interest rates used to strengthen a faltering economy, has finally started to increase its key rates. The Fed announced at .25% lift this week, citing what they say is a strengthening economy and lowering unemployment. The official unemployment rate may be decreasing (now at 5% and trending still lower), but that may be more from an accounting gimmick than from real economic growth. The number of people who are no longer counted after passing though their unemployment compensation period is growing rapidly. This is a manipulation of the data as those people are still NOT working, but are NOT counted.  This number today, which is represented by The Labor Force Participation Rate, shows clearly that the U.S. Labor Market is at a 30-year strength low. The percentage of people NOT working now in the U.S. is up to 37.5% which is the highest percentage since the late 70’s.

Notwithstanding,  the rate move will result in BOTH positive and negative impacts. Here are a few:

Positives:

  • Consumers and businesses will see marginally increased returns from banks on deposits
  • Continued strength in the property (residential and commercial) rental markets as mortgage interest rates rise, making it more difficult to qualify for home or business property purchases

Negatives:

  • Increased payments on some student loans, consumer loans, variable mortgages and credit cards
  • Lower discretionary income, the result of higher payments, will make it more difficult to save

Removing the artificial, suppressing impact of near-zero interest rates will force the still-volatile economy to stand on its own feet. Good or bad, the trend of rising rates is here to stay. How much it helps or hurts the average business or consumer will depend on what side of the financial equation you are on. If you have financial reserves, the rate hike is welcome. However, if you are trying to create and grow a nest egg to hedge against today’s volatility…it may have just gotten harder.