I wasn’t really a part of the economy in the 80’s, but I do seem to remember getting some kick ass savings rates for the filthy lucre stowed away in my junior savings account.   Young me, didn’t realize at the time that to get those 15% returns on a savings account what the banks had to be charging on the loans they made.

With jobership and homeownership and adultship all having occurred – I’m more than a little concerned about an upward trend in the prime interest rate, because things that are affordable at 3%ish interest become much more untenable at 15 or 20% interest.

 

“The Federal Reserve raised its benchmark overnight interest rate by a quarter of a percentage point, which means that the folks who borrow from the Fed (which is kind of like the Bank of Canada, and whose customers are other lenders) will now pay in a range from 0.75 per cent to 1 per cent.

Up until Wednesday, the range was as low as 0.5 per cent.

A quarter of a percentage point? Doesn’t sound like much, so no wonder the announcement got overwhelmed by everything else.

Consider this: the Fed’s rate is now double what it is in Canada. It’s very difficult to believe that the decision there will not have a ripple effect that will eventually hit Canadian mortgages and lending rates — and along with them, people who’ve never lived and owed when rates suddenly jack up.

Fed chair Janet Yellen raised interest rates this week, for only the third time since the financial crisis nine years ago. (Reuters)

But let’s think about the decision, which is only — believe it or not — the third time that the Fed has ever raised a rate since the financial crisis that engulfed the world in 2008. (It is, on the other hand, the second hike in three months.)

On the upside, the hike is generally perceived to be an indication of growing strength and optimism in the American marketplace.

“The simple message,” said Fed chair Janet Yellen, who is expected to step down within a year, “is the economy is doing well.”

But what many people in the finance world are expecting is more of the same; that is, more hikes. Another is expected in June, and the Washington Post used the words “more frequent” to describe what the Fed’s hikes will be like from now on.

The purpose of a rate hike, especially while rates have been (when you think about it) remarkably tiny is to keep inflation in check.

But the other side of that coin is what higher rates can do to ordinary consumers, including those on this side of the border.

Rates are a fraction of what they once were

This is where my head has been lately.

It seems to be we’ve had a full generation of consumers that don’t know the piercing agony that comes when interest rates are high, or who might be inclined to believe that what they’re paying now on, say, their credit card bill is high enough.

Moreover, these consumers may not appreciate to what extent that lending rates have, for almost a decade, have been artificially low. (I’m tempted to call them politically low, too, in light of the 2008 crisis.) 

What would higher interest rates mean for homeowners, and small businesses? In a tight economy, they could be tricky. (Submitted by Kara O’Keefe)

Now, some history, both provincial and personal: In the early Eighties, interest rates were not just in the double digits, they were above 20 per cent. The recession that came with it was harsh, deep and sweeping in its destruction.  

The local impact was crushing, perhaps because there was an ebullient feeling in the wake of the 1979 Hibernia discovery. In 1988, a few years before he died, St. John’s businessman Andrew Crosbie reflected on the wicked boom and bust of the early Eighties. 

“We certainly got caught — but I don’t know if it was in the oil euphoria rather than the interest rate euphoria” that caused so much damage to businesses like his own.”

The idea of being ‘caught’ and forced to make unsavoury financial decisions isn’t particularly appealing – and having one’s future rest on the ‘market’ is distinctly unsettling.  :/

[Source:cbc.ca]

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