Many benefit if Fed stops raising rates

The nation's debtors may soon be able to exhale.

It now appears the Federal Reserve is nearing the end of its long program of raising interest rates. Most economists now believe next month will be the final quarter-point hike.

On Tuesday, the Fed released its March minutes, which also indicated many of the central bankers now want to wait and see the economic impact of the interest-rate rise they have already engineered. Over the past year and a half, they have boosted rates by 3.75 percentage points to 4.75 percent.

"It looks like we are in for at least a pause," says Mark Zandi, chief economist at Moody's Economy.com.

For millions of Americans it will be a welcome hiatus:

• About 25 percent of all Americans now have a home equity loan. The loans have been used to buy cars, boats, and more houses.

• The interest rate on some 11 million adjustable rate mortgages (ARMs) will be resetting at a higher rate over the next two years.

• As of the end of 2004, CardWeb.com estimates the average credit card debt per household was $9,312. The interest rate on that debt has been steadily rising.

• The interest rate for small business loans will top out at close to 8 percent - still a low rate historically.

Surveys show that Americans are beginning to worry about their rising debt load. Last month, the Experian-Gallup Poll found only 15 percent of Americans thought it was a good time to borrow compared with 24 percent a year ago.

"There is less enthusiasm to borrow and we think that is going to translate into lower consumer spending," says Dennis Jacobe, chief economist at Gallup in Washington. "In fact, 19 percent of Americans now say they are worried about making their monthly payments."

However, many people say they have little choice but to use the plastic. That's the case for Joel Mendez, a recent college graduate and Chicago-area young professional, who has racked up credit card debts because he had to pay bills - regardless of the rates.

"If it has been affecting me, I haven't noticed it," he says. "I'm sure it's been affecting my credit card bills, but to be honest, I don't know how."

Despite his need to purchase on credit, Mr. Mendez isn't entirely indifferent to rising rates. Last year, he consolidated his student loans in anticipation of rising rates.

"I locked in at like 3.5 percent," Mendez said. "It was a pretty sweet deal."

That was also the case for millions of Americans who opted for adjustable rate mortgages three years ago.

For a homeowner borrowing $300,000 at 3 percent, the savings over a 30-year fixed-rate loan at 6 percent would have been about $9,000 per year, estimates Bob Walters, the chief economist at Quicken Loans in Detroit.

But now, many of those adjustable-rate loans are being uncapped with the rates ranging from 7 to 7.5 percent. "Now, it may make sense to 'dis-ARM,' " says Mr. Walters. For example, he estimates the monthly savings on a $300,000 loan that becomes a fixed-rate loan would come to about $100 a month with an interest rate below 7 percent.

While that may not sound like much savings, it could amount to a significant amount of money for the total economy since 25 percent of the entire $8 trillion mortgage market is ARMs.

Any savings on interest rates will be welcome.

Mr. Jacobe says Americans are paying more money for their gasoline. "Energy prices have more than offset some of the interest rate effect," he says.

A Fed pause in rate increases would also help lower-income borrowers, who often pay higher rates for their mortgages and credit cards.

"ARMs were a way for lower-income people to enter the housing market and purchase a home, but they have been first in line for rate increases," says Jacobe. "Past increases will continue to be felt, but at least looking forward they don't have to continually look at rate increases."

Many Americans are only vaguely aware of the interest rates they pay on their debt. For example, Tom Becker, an engineer who lives in Brookline, Mass., says he found one credit card with a 29.9 percent rate.

"That's the one I've done my best to take off as much as possible," he says, adding, "It did creep up without much knowledge on my part."

Mr. Becker doubts any change in Fed policy will change his approach.

"Given the fact that I didn't really put two and two together to consider that the rates were rising too far out of control, I can't say that it's going to change my strategy much," he says. "The plan doesn't change: just do my best to lower my net interest rate."