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But the excitement quickly fizzled."The market basically said, 'That's not it,' " notes David Glen. The market said a lot of people are waiting to see what the next step will be.
Despite the market's cool reception, the latest hike will clearly slow spending at a time when stagnating incomes have forced millions of Americans to use credit cards for everything from dental bills to trips to the supermarket. Consumers owed nearly $4 trillion at the end of the second quarter; that equaled 81% of their disposable income, the highest such ratio on record. Experts estimate that last weeks rate hike could add as much as $20 billion next year to the interest paid on everything from credit cards to mortgages. Interest charges on bank and credit cards alone could jump $5 billion.
Rising interest costs will also slow the expansion of small companies, which generate lots of jobs but because of their size must borrow from banks at more than the prime rate. No sooner had the Fed moved last week than many banks boosted their primes from 7.75% to 8.5%. That was harsh news to Leedom Kettell, who runs a printing company in Syracuse, New York, with 10 employees. Kettell had been shopping for a new $40,000-to-$50,000 printing machine for his growing business."But now, with the higher rates, I'm doing all I can to avoid buying," he says. "Postpone is the key word."
; Home buyers who can still afford to shopthe average rate on 30-year fixed- rate mortgages has already climbed from 6.75% late last year to 9.2%, which helped cut housing starts 5.2% last monthare preparing to scrimp on other spending. Two weeks ago, Denver lawyer Patrick Plank and his wife Betsy took out a 9.5% fixed-rate mortgage with a low down payment that they are using to buy an $85,000 town house. "Any interest rate in single digits still looks good," Plank says. But the cost of the mortgage is forcing him to keep his 1987 Toyota instead of trading it in for the newer model he covets.
Such forbearance has begun to worry car dealers. With the average price of an American auto now at $19,200, up $1,000 from a year ago, higher rates could turn interested shoppers into mere tire kickers. To keep sales moving at the brisk pace of 15.5 million cars and trucks a year, the automakers financing units have absorbed part of the higher loan costs instead of passing them along to customers. While that has worked so far, companies fear that sales could drop off sharply if rates go much higher.
Even as the rising rates hurt borrowers, they have been a boon to many savers. Economists say that for every percentage-point increase in short-term rates, holders of securities ranging from Treasury bills to money-market funds gain nearly $20 billion in annual income. Partly for such reasons, experts predict that the latest rate hikes will have little impact on Christmas sales this year. They note that retailers did a respectable, if unspectacular back- to-school business last summer, which usually augurs a solid Christmas season. Moreover, many consumers fail to recognize that the Fed's moves can increase the interest on their credit cards, so they go right on spending. History shows that it takes at least a year for a change in interest rates to spread through the economy, so the full impact will not be felt until late 1995.