Federal Reserve expected to slowly raise interest rates

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The Federal Reserve announced it will begin rolling back its Great Recession-era stimulus plan, a move that will raise interest rates over the next eight years.

Dennis Hoffman, an economist at Arizona State University’s W. P. Carey School of Business, says the change will impact interest rates but will go largely unnoticed by the majority of Americans. According to Hoffman, interest rates should only rise one-percent over the eight-year period.

Many other factors are a more prominent driving force on credit markets and the value of the dollar, said Hoffman, so much so that the changes made by the Federal Reserve will be, “like watching paint dry.”

TED SIMONS: HORIZON, THE FED APPEARS READY TO INCREASE INTEREST RATES. HOW WILL THE RATE HIKE IMPACT ARIZONA'S ECONOMY? ALSO TONIGHT, A BEST SELLING SCIENCE FICTION WRITER TALKS ABOUT SCIENCE AND FICTION AND THE FUTURE, AND HOW ONE SMALL ARIZONA TOWN GAVE MORE THAN ITS FAIR SHARE DURING THE VIETNAM WAR. THOSE STORIES NEXT ON ARIZONA HORIZON.

TED SIMONS: GOOD EVENING AND WELCOME TO ARIZONA HORIZON, I'M TED SIMONS. UNIVERSITY OF ARIZONA'S EMANUEL RICHARDSON WAS ONE OF FOUR NCAA COACHES ARRESTED TODAY ON FRAUD AND CORRUPTION CHARGES. FEDERAL PROSECUTORS SAY THAT THE COACHES OFFERED BRIBES TO POTENTIAL STUDENT ATHLETES AND ACCEPTED BRIBES TO STEER THOSE AND OTHER COLLEGE ATHLETES TO SPORTSWEAR COMPANIES AND MANAGEMENT GROUPS.

TED SIMONS: COST OF BORROWING MONEY COULD SOON BE GOING UP. THE FEDERAL RESERVE IS EXPECTED TO INCREASE INTEREST RATES, COULD IMPACT THE HOUSING AND AUTO INDUSTRIES. JOINING US IS DENNIS HOFFMAN, FROM THE SEIDMAN RESEARCH INSTITUTE FROM THE W.P. CAREY SCHOOL OF BUSINESS. IS THE FED GOING TO RAISE INTEREST RATES?

DENNIS HOFFMAN: THAT'S THE PLAN.

TED SIMONS: WHAT'S GOING ON HAPPEN? BESIDES THE NUMBER GOING UP.

DENNIS HOFFMAN: HERE IS WHAT'S GOING TO HAPPEN, PUT YOU TO SLEEP IN 8 MINUTES HERE. THE FED HOLDS DEBT, PRIMARILY GOVERNMENT ISSUED SECURITY, MORTGAGE BACKED SECURITIES, TREASURY BILLS, BONDS, ET CETERA, THEY HAVE BEEN HOLDING INCREASING AMOUNTS OF DEBT DURING A PROCESS KNOWN AS QUANTITATIVE EASING, SO THEY BUY THIS DEBT FROM THE MARKET AND IN RETURN CREDIT EFFECTIVELY DOLLARS FLOW TO THE CREDIT MARKET AND THAT PUTS DOWNWARD PRESSURE ON INTEREST RATES. THEY'RE REVERSING THAT. THEY NOW HAVE A PLAN TO LOWER THE AMOUNT OF DEBT THAT THEY'VE BEEN HOLDING, AND THEY'RE GOING TO DO THIS GRADUALLY OVER THE NEXT 8 YEARS, AND THAT WILL, JUST AS QUANTITATIVE EASING PUT DOWNWARD PRESSURE ON RATES, THIS WILL PUT UPWARD PRESSURE ON RATES.

TED SIMONS: SO THIS MEANS THE ECONOMY IS NOT IN DANGER OF OVERHEATING OR ANYTHING LIKE THIS, OR WHAT ARE THEY TRYING TO SAY HERE? THE ECONOMY IS STRONG ENOUGH TO HANDLE THIS KIND OF THING?

DENNIS HOFFMAN: OKAY, THIS IS GREAT. THIS IS GOING TO BE GOING ON BEHIND THE SCENES. SO TO GIVE YOU AN ORDER OF MAGNITUDE OF WHAT THEY HAVE PLANNED, EACH YEAR OVER THE NEXT 8 YEARS, THIS PRESSURE, THIS HEADWIND, WILL GENERATE APPROXIMATELY 12 BASIS POINT, THAT'S AN 8TH OF A PERCENTAGE POINT HIGHER INTEREST RATES EACH YEAR FOR THE NEXT 8 YEARS, SUMMING TO APPROXIMATELY 1 FULL PERCENTAGE POINT IN YOUR MORTGAGE RATE, YOUR AUTO LOAN RATE, ET CETERA. BUT TED, WHEN I USE THE BASIS POINTS, 12 BASIS POINT, THAT'S AN 8TH OF A PERCENT, I THINK THE RATES MOVE 2 TO 3 BASIS POINTS BY THEMSELVES TODAY. SO WHILE THIS TREND IS HAPPENING, YOU'RE GOING TO HAVE ALL OF THE MOVEMENTS THAT NORMALLY TAKE PLACE IN THE MARKET. AND YOU ASK A VERY GOOD QUESTION, I THINK, IF THERE IS WEAKNESS IN THE ECONOMY, IF THERE IS A NEED TO BEGIN REVERSING THIS, THE BOARD AT THAT TIME, THE CHAIR, WHOEVER THAT IS AT THAT TIME WILL BEGIN REVERSING THIS TENDENCY.

TED SIMONS: ALL RIGHT. BUT AS WE SEE IT NOW, THIS QUANTITATIVE EASING OVER WITH, INTEREST RATES GOING, IMPACT ON THE AUTO INDUSTRY, IMPACT ON THE HOUSING INDUSTRY?

DENNIS HOFFMAN: LET'S DO ARIZONA. SO FIRST OF ALL, IF YOU HAVE A FIXED RATE MORTGAGE, NO IMPACT. RIGHT? YOU ALREADY HAVE A MORTGAGE CONTRACT. THESE ARE FOR PEOPLE LOOKING TO REFI, LOOKING FOR A NEW MORTGAGE, LOOKING FOR A NEW AUTOMOBILE. I'M SAYING OVER 8 YEARS, WE'RE TALKING 1 FULL PERCENTAGE POINT. I RANSOM NUMBERS THIS AFTERNOON, FOR A $200,000 MORTGAGE, IF YOU'RE GOING TO GET ONE AND IT'S ONE FULL PERCENTAGE POINT, THIS WOULD BE THE IMPACT AT THE END OF -- AT 8 YEARS, THAT WOULD BE ANOTHER $120 A MONTH. SO AS WE INCREMENTALLY MARCH TOWARD THAT IMPACT, YOU'RE TALKING ABOUT $15 A MONTH. BUT AGAIN, TED, THIS IS NOT FOR EXISTING MORTGAGE HOLDERS.

TED SIMONS: RIGHT.

DENNIS HOFFMAN: THESE ARE FOR FOLKS BUYING NEW HOMES, BUYING NEW CARS.

TED SIMONS: YES, GETTING BACK INTO THINGS.

DENNIS HOFFMAN: OR IF YOU HAVE A VARIABLE RATE MORTGAGE.

TED SIMONS: EXACTLY. AS FAR AS INTERNATIONAL INVESTMENT, WHAT DOES IT MEAN REGARDING THE DOLLAR? I KNOW THE U.S. DOLLAR --

DENNIS HOFFMAN: HIGHER RATES MEAN HIGHER VALUE DOLLARS, THAT'S JUST TENDS TO BE THE CASE. LONGER RUN, IT'S A LITTLE BIT MORE MIXED. AGAIN, THERE'S SO MANY OTHER FACTORS THAT DRIVE THE CREDIT MARKETS, THAT DRIVE THE VALUE OF THE DOLLAR, THIS WILL BE, I THINK, AS THE FEDS CHARACTERIZED IT, IT'S GOING TO BE A LITTLE BIT LIKE WATCHING PAINT DRY. IT'S JUST GOING TO BE GOING ON IN THE BACKGROUND. I THINK THAT FOLKS THAT WERE ALARMED BY THIS BIG ACCUMULATION OF THE FEDS' BALANCE SHEET WILL BE MORE COMFORTED AS THE BALANCE SHEET RUNS OFF AND THAT WILL POSITION THE FED, BY THE WAY, TO REENGAGE IN THIS TYPE OF POLICY SHOULD, GOD FORBID, WE EVER NEED TO DO IT AGAIN.

TED SIMONS: BOTTOM LINE HERE, LAST QUESTION, OVERALL IMPACT FOR ARIZONA, WHAT DOES THIS DO?

DENNIS HOFFMAN: WELL, IT WILL BE EVER SO SLIGHTLY HIGHER INTEREST RATES IN OUR MORTGAGE MARKETS, AND THAT WOULD BE A SLIGHT HEADWIND FOR THE REAL ESTATE MARKET. BUT IT'S ONLY GOING TO PREVAIL IF THE ECONOMY REMAINS HEALTHY. IF THE ECONOMY BECOMES MORE FRAGILE THAN IT IS TODAY, THIS WILL -- THEY'LL REVERSE THIS IN A HEARTBEAT.

TED SIMONS: THEY'LL PUT THE BRAKES ON IT REAL QUICK, SQUEALING BRAKES, THE WHOLE NINE YARDS. INTERESTING STUFF. THANKS FOR BEING HERE.

DENNIS HOFFMAN: GOOD TO BE HERE.

TED SIMONS: UP NEXT, A CONVERSATION WITH ACCLAIMED SCIENCE FICTION WRITER KIM STANLEY ROBINSON.

Dennis Hoffman: Economist, W. P. Carey School of Business at Arizona State University

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