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Interest rates and the economy

The Federal Reserve’s decision not to raise interest rates for the 18 th time in a row will have tremendous impact on just about every aspect of the economy.

Interest rates affect everything from mortgage prices to credit card debts; and although the Fed did not raise the rates, they are not predicted to decrease any time soon.

This fact alarms many people about the future of the economy, and America’s spending habits in general. These higher than normal rates are going to affect every aspect of the economy, especially when the housing market is already slow.

The August 13, 2006 article on mcall.com, by Becky Yerak, “Mortgage debt ticking higher,” gives some insight on the interest rate environment and how it is affecting the economy.

“ It's supposed to help the economy. The Federal Reserve's decision to hold the line on interest rates this week means that many borrowing costs won't be going up again any time soon. But the central bank certainly did not roll back rates, and that provides little relief to overextended consumers struggling with heavy debt levels. Troubles abound: credit card debt remains high, and foreclosures in some markets are on the rise.”

So although the Fed did not raise rates again, which is a very good thing, many people are still having trouble coping with the higher rates.

One of the biggest concerns surrounding the interest rates is the affect it will have on adjustable rate mortgages or ARMs.

With an ARM, the price of your monthly mortgage payment relies on interest rates to determine the bill. When interest rates rise, so will your monthly mortgage payment.

“One of the most-worrisome outcomes of a higher interest-rate environment is the impact on adjustable rate mortgages. ARMs have left many homeowners on the hook for monthly payments hundreds of dollars higher per month. Making matters worse, the resetting of ARMs coincides with higher energy prices. ‘This is crunch time for households,’ Bernard Baumohl, executive director for the Economic Outlook Group LLC, said Wednesday. ‘People have been trying to finance a standard of living that's not affordable.’”

People have taken out more debt recently than in year’s past. The higher prices of food and gasoline are also causing people to feel this money pinch. The high credit card interest rates are also making it more difficult for people to spend as much as they have in the past.

“ Borrowing by U.S. consumers accelerated in June as credit card debt jumped, the Federal Reserve said this week. Consumer credit, or non-mortgage loans to individuals, rose 5.7 percent at an annual rate, to nearly $2.2 trillion. The surge was nearly triple what economists expected.”

Although debt rates are definitely higher than they were before, many economists are not overly alarmed about our economy. One of the reasons is that mortgages last about five years longer than in the past, and this will soften the blow of the higher rates a little bit.

“‘So the notion that rising interest rates will clip everyone with a home mortgage just isn't right,’ said Richard DeKaser, chief economist at National City Corp.

‘A significant chunk of mortgages are subject to interest rate resets, and while that will create a rising debt burden for those individuals, it should not be problematic for the U.S. economy as a whole,’ he said. Estimates of mortgages coming due for resets over the next year range as high as $1 trillion, DeKaser said, noting that the entire home mortgage market is about $8.5 trillion. Many will refinance before the mortgages reset.”

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