Fed likely to raise rates .50% for the first time in 5 years

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict , this post may contain references to products from our partners. Here’s an explanation for

Slow and steady may have worked for the tortoise. But for
Federal Reserve Board officials, it isn’t paying off at all.

Their series of bit-by-bit rate increases have accomplished virtually nothing, according to recent economic data. Consumers are still spending with reckless abandon. Companies are jacking up wages, salaries and perks to attract a shrinking pool of available workers. Inflation, after remaining dormant for so long, appears to be gaining traction. As a result, Chairman Alan Greenspan could level a WWF Smackdown!-style rate hike at the Fed’s May 16 policy-setting meeting for the first time in more than five years.

But while pundits, economists and Wall Street millionaires endlessly debate whether 50 basis points will help stock prices climb again, the story of how real people are affected by rate increases sometimes gets lost in the shuffle. To remedy that, Bankrate.com hit the streets.

Rate increases haven’t trickled down
What we found in conversations with people on the front line of the interest rate battle is that consumers haven’t really felt the Fed’s hand in their pocket and thus haven’t decided to storm the gates in Washington just yet. But mortgage brokers, car shoppers, employment counselors and consumers aren’t too thrilled about Greenspan’s actions either. And if rates continue to rise with the temperature — as some experts think they will — tempers could flare later this year.

“I was reading the other day an article that said something about Greenspan saying people were getting higher wages” and that was a problem, says Ken Montgomery, executive director of the
Palm Beach County Workforce Development Board in Riviera Beach, Fla. “But to me, that’s a good thing.”

Employees are finally getting what they deserve, he says, and the tight job market has helped those who would otherwise be in dire financial straits. His nonprofit organization has been able to help some 4,600 county residents get off welfare during the past four years, something that would have been a “tremendous challenge” without the economy’s cooperation.

“Most of them are happy to get a job and now they have the ability to get a job,” he says, adding rhetorically: “If I’m making $10 today and I start making $12 tomorrow, somehow that increases inflation? How’s that?”

Unfortunately for consumers who want cheaper mortgages, credit cards and car loans, professional economists think they have the answer to that question. If wages rise too much, they say, companies won’t be able to swallow the higher labor costs. That would force them to raise prices, sparking inflation.

Consumers are still spending
But the experts’ list of concerns doesn’t stop there. They’re also worried about the cost of commodities such as oil, which is much more expensive than it was last year even after a slight decline from March highs. Consumer spending has shown remarkable strength, too, with sales of automobiles and homes near recent records despite higher rates. That has spurred manufacturing activity and fueled fears that demand for goods could eclipse supply, allowing businesses to raise prices.

“Consumer spending is a big concern,” says D.C. Aiken, vice president of
Home Banc Mortgage Corp. of Atlanta. “Look at the unemployment numbers.

“More people have got jobs. More people have got money.”

OK, fine. That’s why the Fed raised rates five times during the past 11 months. But why won’t they stop now and let those 125 basis points do the trick? Frankly, because the people doing the spending say it’s business as usual in their lives.

Take Karen Shobel, 43, a North Palm Beach, Fla., housewife. She bought a slightly used Ford Taurus back in November and financed the “high 20s” price through the dealership without thinking twice about the loan cost. That’s despite the fact the average used car rate was 10.04 percent that month, up from 9.68 percent in June — before the Fed started hiking rates. Today’s rates, which average 10.37 percent, don’t concern her either.

“Whatever there is at that time, it’s just the way it is,” she says. “I think it’s important, but I don’t think it’s so astronomical that I would say, ‘No way am I buying.’ “

Apathy is rampant
Even people in lines of business most likely to get slaughtered by higher rates don’t seem concerned.

Linda Sander is vice president of
Home Mortgage Company of the Palm Beaches Corp. The developer-affiliated mortgage broker does most of its 40 or so loans a month for shoppers looking to buy homes and townhouses in a nearby planned community called

New home sales would be one of the first things to slow if mortgage rates surge higher. But Sander says she isn’t worried and expects the multiyear DiVosta Homes Inc. project to keep her busy for a long time. A home shopper herself in fact, she openly jokes that she and her husband are “looking at a price we can’t afford.”

“Am I worried about it? No,” Sander says. “I want to live in a nice area and I don’t care what the interest rates are.”

That attitude is what Greenspan’s working against, for better or worse. If he can’t make a dent soon, consumers could be facing a double-digit
Wall Street Journal prime rate before the year is over. It’s only 100 basis points away at this point and it’ll be even closer if the Fed halves the spread Tuesday.

Still, some market watchers argue we’re at or near an interest-rate peak already. Aiken of Home Banc Mortgage says he expects 30-year home loan rates to top out at 8.75 percent while Richard DeKaser, chief economist with
National City Corp. in Cleveland, calls 9 percent a “ceiling.” They figure the economy will slow enough later this year that rates will drop.

But as the Fed meeting nears, it might help to remember that most “experts” said the same thing last year. The only difference?

Their “line in the sand” was 8 percent.