Low interest rates have fueled consumer spending  ALSO: Special Report: Eyes on the Fed Tips and Tools to see what a rate hike means to you Economic good times not rolling down on the American farm Economists debate Fed action RELATED VIDEO CNN's Garrick Utley looks at one family's enjoyment of the booming economy Windows Media 28K 80K CNN's Charles Feldman reports on how a rise in interest rates may affect the mortgage industry Real 28K 80K Windows Media 28K 80K

June 30, 1999
Web posted at: 3:18 p.m. EDT (1918 GMT)

In this story: The worst may be past A silver lining for investors RELATED STORIES, SITES

WASHINGTON (CNN) -- The quarter-percentage point interest rate increase announced Wednesday is unlikely to affect consumer spending, analysts said, especially because the Federal Reserve Board indicated more increases may not be as likely as some analysts thought.

In a bid to head off the threat of inflation, the Federal Reserve's Open Market Committee announced a quarter-point increase in the federal funds rate, moving it to 5 percent. Because the move was expected, the markets had already made adjustments.

"The market has anticipated a Fed rate hike, and as a result, long-term interest rates have moved up really substantially over the last couple of months," said Federal National Mortgage Association analyst David Berson.

Mortgage rates have climbed more than a percentage point in the past six months, and interest rates on credit cards and car loans have also been adjusted higher. So with the pain already inflicted, many financial analysts say consumers shouldn't fear a small increase in rates.

"We're not going to see much as a result of this news," financial planner Ric Edelman said.

What may be more important for consumer interest rates is not what the Fed does Wednesday, but what it might do later. The Fed changed its tightening bias to neutral, which many investors took as a sign that another increase is not likely soon. But others said it is not a definite sign that this hike will not be followed by another later this summer.

"The unsophisticated individual who is really not in the business is going to look at (the rate hike) and worry about the rates going up even further, and will probably accelerate their buying right now," said California mortgage banker Charles Smith.

Berson says consumers already are dealing with higher interest rates

If the Federal Reserve suggests it will continue to raise rates, consumers could move quickly to lock in mortgage rates. That could push home sales higher, but prompt a decline when the rush ends.

Low rates have fueled consumer spending growth of more than 6 percent a year, while personal household savings last month fell into the red to -1.2 percent, the lowest since the Depression of the 1930s.

Raising the cost of borrowing may cool the booming economy - the Index of Leading Economic Indicators rose 0.3 percent in May, suggesting growth will continue -- but a small increase would still leave consumers better off than they were a decade ago, when interest rates were in the double-digit range.

"I think rates are almost peaking," said David LeReah, of the Mortgage Bankers Association. "I see 8 percent as probably the ceiling."

The Fed last adjusted interest rates in September 1998, cutting them three-quarters of a percent in three separate moves spurred by Russia's financial crisis and the collapse of the Long-Term Capital Management hedge fund.

And higher rates would have a silver lining also, driving up the returns on money market funds and certificates of deposit.

Correspondents Charles Feldman and Patty Davis contributed to this report.