This past week the Federal Reserve was meeting to determine if they would raise interest rates indirectly by raising the federal funds rate. The FED has not raised the federal funds rate for almost a decade. If the federal funds rate is raised, it will impact the banks’ interest rates on all loans. Banks will not lend money at a lower rate than they borrow it from the FED, that just isn’t good business. However, if banks raise the interest rates too high, no one could afford to borrow it into existence. This higher interest rate on loans will cause borrowing of new money to stall.
Once consumers stop borrowing money into existence, our economy will begin to shrink. This tactic done by the FED is used to control inflation. If no new money is being borrowed, no new construction will begin. Very few people will purchase homes at over 10% interest for a 30 year fixed loan. Construction jobs will begin to dry up. Real estate agents will be competing for few buyers, and sellers won’t be able to find a buyer for their property. But that, is just the housing market.
Another market that will be adversely effected will be the automobile industry. Most people will not buy a new car at 10% or higher for an automotive loan. People will find they can’t afford to make the large interest payment and not purchase a new car, but will end up fixing their older cars or buying used. The automotive industry will feel the pinch and produce less cars, and layoffs will occur. On the positive side, automotive technicians who fix and service vehicles will find themselves busy as people tend to fix their vehicles instead of purchasing new ones.
As money becomes less scarce as the buying power once available with low interest loans dissipate, the entertainment business will begin to see a fall in profits. People will begin to spend their money on necessities versus entertainment. Eating out which may have been common place will become a luxury as fewer people can afford to do it. Restaurants that do not have a regular established clientele may see themselves in financial jeopardy. All forms of entertainment will begin to feel the pinch. Once these businesses start to close. The owners and employees’ spending power in the community will also be lost to other merchants. Unfortunately, fast food restaurants will remain, the least healthy of food sources, because it will be what the majority of people can afford with the hope of retaining the “luxury” of eating out.
The FED will most likely postpone once again raising interest rates this close to Christmas. At the latest, they will raise rates by the following March. The FED is promising they will begin to raise interest rates incrementally over the next few years. If you are planning to purchase a home the time is now before rates increase again. If you are planning to sell your home the time is also now, since buyers are shopping before the door on low interest rates are closed for an unspecified period of time.
As of this week, the FED has postponed interest rate hikes for now, but they meet again in December to announce their next decision to raise the federal funds rates. After reading several articles the American public is being prepped by the media to expect rising interest rates. The increase will happen. If a person has any variable interest rate loans such as second mortgages, car loans, mortgages with adjustable arms, credit cards; it is best to pay them off right now while interest rates are still low. A variable interest rate loan fluctuates with the federal fund rates. Once the Federal Reserve raises rates these loan payments will rise too. If a person is on a tight budget already, these variable interest rate loans could cause a person to not make ends meet from paycheck to paycheck and the things they hoped to purchase from these loans will eventually be lost anyways. If a person does not have the finances to pay them off; it would be wise for a person to refinance their home now and wrap some of these payments into a 30 year fixed low interest loan while the fixed interest rate is still low. It makes sense to wrap larger variable interest loans into a smaller fixed interest one. This is definitely not the time to be thinking about taking out large variable interest loans, but we should see banks pushing them hard these next few months before Christmas since they are projecting interest rates to rise as well as their profits.
As a person who teaches high school economics, this to me is like watching football for the rabid sports fan. We live in exciting economic times, and they are about to get a whole lot more exciting. I am warning my students to prepare to see these interest rate increases also in student loans as they should take advantage of the dual enrollment / college credits they can earn while they are still in high school. They can save the cost of two years tuition at most liberal arts universities if they take advantage of the program and take their studies seriously.
So, how does this post relate to living sustainably? For interest rates not to effect us, we need to live outside the monetary system just enough so that a rise in interest rates does not affect us and our ability to provide for our families. Living sustainably is about living within one’s means and trying to utilize the natural resources around us, like growing our own food and harvesting our own electricity. My wife and I aren’t even close to what we want to do to live sustainably. I must still work a job and bring home a paycheck like the majority of people. However, we still have a dream of being sustainable, and we continue to strive for it, getting closer each and every day.