If anyone tells you they know what’s going to happen after the Federal Reserve Board of Governors raised its interest rate target today by 0.25 percent, they’re probably lying.
That’s because the current situation is unprecedented, according to Kurt Rankin, a regional economist with PNC Financial Services Group Inc. And when something has never happened — namely, the target rate staying near zero percent for seven years — all you have to go on when the target rises is theory, not past evidence.
Since December 2008, the Federal Reserve’s target range for the federal funds rate has been zero to 0.25 percent. On Wednesday, the Fed decided to raise the target range to 0.25 percent to 0.5 percent.
But even if there is no definitive answer on what will happen next, there are some popular theories going around, like these:
1. The Fed’s campaign of raising interest rates will be gradual
It might take two years or more to get up as high as 3 percent.
Because this situation is unprecedented, the Fed already is taking a chance by raising its target even a quarter of a percent, according to Rankin.
2. This isn’t a guarantee that rates will continue to rise at every Fed meeting.
It will be a measure-twice — or even five times — and-cut-once situation, with the Fed closely examining the performance of the economy through at least 2016 before it starts to raise rates higher and more quickly.
Rankin said he believes the Fed will raise rates possibly three times out of its eight meetings in 2016, getting back to around a target of 1 percent by the end of next year.
“If the jobs rate slows down and it goes sub-200,000 jobs added in the next few months, and it goes down for no other logical reason than the interest rates have been raised, I think you’ll see a slow pace of rising,” Rankin said.
3. Mortgage rates will rise.
We know that, but it could lead down one of two paths, according to Rankin. It could cause fewer people to look for a mortgage now that rates have gone up, or it could spur mortgage lending activity as people want to make sure they buy before rates go higher in the next few years.
“Again, it’s that unprecedented nature of it,” Rankin said.
4. The uncertainty surrounding the mortgage industry will also lead to uncertainty in the construction industry, Rankin said.
Depending on which mortgage lending trend takes hold, construction will either benefit from a boom or take a hit as fewer people look to get a mortgage after historically low rates go away.
5. The rate hike likely won’t affect the retail sector much, because consumer credit spending already is low.
Interest rates on credit cards already are high enough that the Fed interest rate hike “isn’t going to register as that much” on credit card rates, so it shouldn’t hamper consumer spending, Rankin said.