WASHINGTON — There is little doubt that the Federal Reserve will raise interest rates this year, either in June or soon afterwards. Now the question is: How much and what impact will it have?

In December, the Federal Reserve’s open market committee revealed that nine of its 17 members expected to raise the federal funds rate to 1.125 percent by the end of 2015. Yet just three months later, the crumbling in the value of the euro, persistently low inflation and modest economic growth in the United States have convinced most analysts that the Fed will not come close to hitting those numbers.

“I don’t expect that they’ll do more than a quarter point,” said Ed Yardeni, president and chief investment strategist of his own advisory firm Yardeni Research. “Bupkis, as we say in New York,” he added, using a Yiddish word that has come to mean “absolutely nothing” in English.

“I think they’ll do the bare minimum,” he added, “for credibility sake. To show they can. They haven’t had any practice.” He predicted that the Fed’s action will be described as “one and done.”

Indeed, the Federal Reserve has kept short-term interest rates in a target range of zero to a quarter of a percentage point for six years, an extraordinary and unprecedented effort to rebalance and restart the American economy after the financial crisis hit in late 2008. If the Fed raises those rates, it could increase the cost for Americans of mortgages, car loans and credit card debt.

Kenneth Rogoff, a Harvard economic professor and former chief economist at the International Monetary Fund, said that while uncertain about the timing, he expects the Fed’s first move to be a quarter of a percentage point.


“I can’t see why they would jump and move quickly,” he said. “It certainly will be a big percentage increase from nothing to something.” He warned that the central bank was still in “somewhat uncharted territory. They should be very cautious.” He added that the risk of choking the recovery prematurely was greater than the risk of seeing inflation “overshoot” the Fed’s 2 percent inflation target.

Investors will be scouring Wednesday’s Federal Reserve statement and Fed chairman Janet Yellen’s remarks for clues about next steps.

What areas would be hurt most by a rate increase?

Sam Kater, senior economist at CoreLogic, a real estate information and strategy firm, worries that abruptly higher interest rates could “do a fair amount of damage to an already nascent and weak housing recovery.”

Kater said that when interest rates rose rapidly in 1994 and 2004 many borrowers switched to adjustable rate mortgages, which offered lower short-term rates and the hope of lower rates in the future. But Kater said that a tighter regulatory environment for ARMs and more cautious lenders have reduced the availability of such mortgages.

“In short, in the past the mortgage market could buffer the impact by switching to adjustable rate products,” he said. Now, he said, “that is not the case.”

Karen Shaw Petrou, managing partner of the advisory firm Federal Financial Analytics, says that banks and other financial institutions could be better off with higher rates – provided rates rise broadly because “rates are not only unusually low but unnatural and that has distorted financial markets.”

Petrou said that the spread between the cost of funds and returns on assets has averaged just over 3 percent, about a percentage point below historical norms. “If the rates are increased slowly and the market isn’t surprised and an increase comes in tandem with an economic recovery that the Fed justifies it on, then there’s nothing but good in this for the financial services industry,” she said. “It just all has to work as well as everyone hopes or there will be some bumps along the way.”


Household debt also remains a point of concern. It has declined from peak levels in 2008, and with low interest rates, it’s easy for households to cover payments on those debts, and household debt service stands at historic lows.

“While many households still face challenges, the aggregate ratio of debt to disposable income in the household sector has decreased to a level last seen in 2002, as households have both increased their savings and reduced their borrowing,” said the new Economic Report of the President. “The combination of lower debt levels and lower interest rates has reduced the aggregate value of households’ debt service payments to 9.9 percent of disposable income, the lowest level since at least 1980.”

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