About half of Americans say they are concerned about the effects of rising interest rates, according to Bankrate’s monthly Financial Security Index survey. That’s a significant jump from a year ago, when 41 percent of people said they were concerned about interest rates going up.
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Prepare for higher rates
Interest rates indeed have been rising. The Federal Reserve raised short-term interest rates by a quarter of a percentage point in December 2015 and again last month. As a consequence, the prime rate increased half a percentage point over that time, to 3.75 percent.
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Interest rates on most credit cards and home equity lines of credit have risen half a percentage point over that time, too. Mortgage rates are about one-eighth of a percentage point higher than just before the Fed’s rate hike 13 months ago.
The inflation rate has been inching upward. The Consumer Price Index rose 2.1 percent in 2016, just slightly above the 2 percent rate that the Federal Reserve aims for.
“Inflation is at the Fed’s target and with manufacturing and home construction solid, there is every expectation that multiple rate hikes will occur this year,” says Joel Naroff, chief economist for Naroff Economic Advisors.
Lindsey Piegza, chief economist for Stifel Fixed Income, says the Fed will use rising inflation as a reason to raise short-term interest rates. But she’s not going to guess when, because the Fed’s timetable partly depends on federal spending priorities.
“Of course, increased uncertainties from a fiscal standpoint will add at least some sense of hesitancy for participants leery of the timing, size and composition of any future fiscal policy initiatives,” she says.
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Where the concerns are
Among those who say they are concerned about the effect of higher interest rates, the main worry is what they portend for the stock market. Fewer say they are concerned about their personal financial situations.
“As the stock market has moved higher, more Americans are concerned that rising interest rates could be the market’s undoing,” says Bankrate’s chief financial analyst, Greg McBride, CFA.
Among those who say they aren’t concerned about rising interest rates, a plurality says it’s because interest rates have been artificially low. The next-biggest group says they’re not concerned about higher rates because they want the additional interest income on savings.
You might expect retirees to be more enthusiastic about interest income than other age groups, but that’s not the case. Millennials (8 percent of 18- to 29-year-olds) are about as likely to say they want additional interest income as those ages 50 to 64 (6 percent of them) and those 65 and older (7 percent).
“With the meager savings most Americans have, the prospect of higher interest income from rising interest rates is a motivating factor for just 5 percent of households,” McBride says.
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Security is down, but positive
Bankrate’s Financial Security Index, or FSI, asks Americans about how their savings, job security and other financial factors are now compared with last year. It gives a numerical expression of Americans’ level of financial security. Anything over a threshold of 100 indicates that respondents feel that they’re better off than they were a year ago.
The index slid from 104.3 in December to 101 in January — lower, but still a level that indicates improved financial security over the past year.
Date, Financial Security Index 2016-01-01,101.5 2016-02-01,103 2016-03-01,102.7 2016-04-01,100.9 2016-05-01,104.7 2016-06-01,103.2 2016-07-01,102.7 2016-08-01,104.5 2016-09-01,99.9 2016-10-01,101.3 2016-11-01,104.9 2016-12-01,104.3 2017-01-01,101
The FSI survey asks respondents about their debt — specifically, whether they are more or less comfortable with the amount of debt they carry now, compared with a year ago. Half say they are as comfortable with their debt as they were a year ago. The rest are almost evenly split between those who are more comfortable with their debt than a year ago, and those who are less comfortable.
Respondents’ comfort with the debt level goes up along with income. The people who are most uncomfortable with their debt are millennials, and the discomfort falls off with age.
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The Financial Security Index is based on a national telephone survey made in English and Spanish by Princeton Survey Research Associates International. The survey was conducted Jan. 5-8, 2017, of 1,003 adults living in the continental United States. The survey has a margin of error of plus or minus 3.7 percentage points.