Consumers loaded up on short-term debt will likely feel the pinch from Thursday’s quarter-point rate increase by the Federal Reserve.
The move – intended to ease the risk of inflation – brings the federal funds rate to a five-year high of 5.25 percent.
The consumer inflation rate for the Denver-Boulder area has lagged the national level for the past three years. But local economists said that doesn’t necessarily mean the region’s economy will experience the impacts of the rate hike any more severely.
“I can’t see that it is going to affect Colorado any differently,” said Tucker Hart Adams, a regional economist for U.S. Bank.
Colorado’s annual inflation rate has lagged the national rate over the past three years largely because housing costs – which make up more than a third of the calculation – have remained flat while they rose significantly in other parts of the country.
“We have seen very minimal price increases in housing here; home appreciation has been 3 to 5 percent,” said Patty Silverstein, president of Littleton-based Development Research Partners.
Other Colorado costs, including energy and transportation, have tracked with national increases.
Those numbers, however, make up a much smaller portion of the overall CPI, so the local inflation rate has remained much lower, said Rudy Andras, an economist and vice president with RBC Dain Rauscher in Denver.
No matter where they live, consumers will feel an impact.
“It can’t be anything but a bad thing,” said Rich Wobbekind, an economist at the University of Colorado’s Leeds School of Business. “It is certainly going to affect the consumer, who is already facing higher energy prices and higher gas prices.”
The most notable squeeze on consumers’ wallets will come from short-term debt such as credit-card interest, home- equity lines of credit and some adjustable-rate mortgages, he said.
The federal funds rate is the overnight interest rate banks charge each other. To make up for the increase in these rates, banks raise interest rates on consumer and business loans.
Pam Dumonceau, a financial adviser and owner of Consistent Values Inc. in Aurora, doubts the rate hike will stop many consumers from spending.
“If the average consumers want a new car, they are going to go and get it no matter what the interest rate is,” she said.
Generally it takes about six months for a rate change to have a tangible effect on business and consumer spending, Silverstein said.
As people begin to pay higher interest rates on loans and mortgages, the hope is that they will spend less on other items, curbing inflation, she said.
That’s why Margaret Lucero said she supports the recent string of rate hikes.
“Americans have decided that they can spend as much as they can, but it’s not helping us. We don’t know how to deal with (debt),” said the Albuquerque math teacher visiting Denver.
But not everyone is complaining.
The rate hike “will have a positive effect on me because I’m looking to put money into some CDs,” said Art Curtis, a geologist from Bailey. “I’m not feeling it on the credit-card side because I pay them off every month.”
Curtis said that he’s not concerned about his mortgage because he has a fixed interest rate for another couple of years.
Investors who put their money into corporate bonds, floating rate funds and certificates of deposit will benefit from the rate hike, Dumonceau said.
Staff writer Kristi Arellano can be reached at 303-820-1902 or karellano@denverpost.com.
Staff writer Kimberly S. Johnson can be reached at 303-820-1088 or kjohnson@denverpost.com.
