What Fed tapering means for you

What Fed tapering means for you

In a article written today by Mr. Fottrell via marketwatch.com, he points out the painfully obvious; that the interest rate hike via exit of Federal Reserve Policy is the one thing we know for certain will come from the prolonged tapering. Most importantly for Gen Y college students drowning in outrageous post-grad loan payments driven by a spike in rates will continue to redefine the value of a college education as we continue to explore this economic era based in debt. When you factor in the rates that the Millennial’s will face for basic living expenses(IE car and home loans) – this is a group of young adults who needs to grow up, smarten up, and take action.

By Quentin Fottrell @ marketwatch.com

The Federal Reserve’s funneling of trillions of dollars into the economy over the past five years has provided a shot in America’s arm. The stimulus has affected consumers more than they realize, experts say, as will the tapering.

On Wednesday, the Fed  announced it would begin to wind down the quantitative easing program known as QE3. Analysts say consumers should start to prepare now — especially those who are planning to buy a car or home within the next three to six months. “The stimulus program was supposed to boost spending going in, so it’s going to reduce spending going out,” says Peter Morici, economist and professor at the University of Maryland’s R.H. Smith School of Business.

Tapering may increase the cost of financing big-ticket items and rates on student loans. “If your furnace goes out and you only have $700 in the bank, you will either have to freeze or buy it in installments,” Morici says. “The same goes for any emergency repairs on your home.” Similarly, college students struggling under the weight of rising tuition fees may face a new challenge in 2014: rising interest rates on loans. “Colleges are already seeing concerns about this reflected in their applications,” Morici says. Law schools are facing a fall in admissions due to rising costs: 54% have reported cutting their entry law school classes for the 2013-14 academic year, according to the 2013 Kaplan Test Prep law school survey.

Mortgage costs will also increase when the Fed pulls back on QE3, says Lawrence Yun, chief economist with the National Association of Realtors, the trade group for the industry. “Sellers had a very easy time selling houses in the last year,” he says. Those who need to make a move to a better school district or larger home, he says, “need to realize that it could be more challenging a year from now.” The average 30-year mortgage rate currently hovers at 4.3%, “historically a very, very favorable rate,” but that could rise to 5% or 5.5% next year, Yun says.

Auto financing rates have followed the general drop in interest rates that accompanied the Fed’s stimulus program, which means they’re just likely to rise with the winding down of that program, says Lacey Plache, chief economist at car-shopping website Edmunds.com. But consumers could get a break as dealerships get aggressive on discounts to offset a drop in sales. “Last summer auto loan rates remained flat even as mortgage and other interest rates rose,” Plache says, primarily because automakers have the ability to subsidize auto loan and lease rates on deals funded through their financing arms. “While subsidizing rates could cut into their profits, it could be well worth the cost in order to not disrupt current sales momentum,” Plache says.

Indeed, some consumers may already be buying cars because they believe auto financing rates will go up next year, says Karl Brauer, senior analyst at auto-pricing publisher Kelley Blue Book. “Does this suggest a drastic drop-off in car sales once rates start to climb? Possibly, but several other factors are contributing to car sales,” he says. There’s still pent-up demand — the average age of a car on the road is 11.4 years, according to market research firm Polk — and continued easy access to credit should help mitigate the negative impact of rising rates in 2014,” he says. Car sales are expected to 16.4 million, according to KBB, which would be the highest sales since February 2007.

On the upside, however, U.S. travelers may get more bang for their buck when they travel overseas next year — as long as they’re not using their credit cards, experts say. Indeed, the dollar already rose sharply against several currencies in the past week as speculation mounted that the Fed could be pulling back on QE3 — and then softened when again this week when the market grew less sure. “Plan overseas travel but don’t book it until the dollar appreciates in value,” says Yung Trang, president of TechBargains.com.

And those dependent on fixed income — namely, retirees — should also do better with tapering. “Interest rates close to zero punish savers and retired folks,” says Mark Perry, a professor of finance and business economics at the University of Michigan-Flint. “Right now, consumers are getting almost zero interest on their checking or savings account.” There’s about $7.6 trillion in savings and small time deposits, Perry says, so every 1% increase would give American savers $76 billion in additional interest income. Retirees more than any other group typically keep their most of their money in short-term investments and fixed income, says Robert Johnson, director of economic analysis at Morningstar. “For many, that could have meant fewer trips to Florida and smaller gifts for the grandkids,” he says, “so they need a little relief.”

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