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Economic angst: Three reasons rising interest rates are scary

U.S. Federal Reserve Chairman Jerome Powell, shown after a March 21 news conference, has signaled more interest rate hikes are expected. There are some reasons to be concerned if the Fed does too much, too fast. [Photo by Alex Wong/Getty Images, File]
Published Mar. 28, 2018

Most headlines scream that the threat of an international trade war is responsible for the recent turbulent markets.

But another factor — rising interest rates — has also made investors wary and may have a more immediate impact on many Americans, whether you're a small business owner trying to find capital or someone trying to work your way out of debt.

The Federal Reserve keeps ratcheting up rates — at least three hikes are expected this year — under a firm belief that economic growth will persist, unemployment will remain low, and it has to act to keep inflation in check.

Yet there's a price to pay if rates rise too much, too fast. Here are three reasons to be concerned:

1. A crimp in small business growth

Owners of small businesses throughout Florida remember when banks and other lenders abruptly turned off the spigot roughly 11 years ago as the Great Recession was just starting. Borrowers lost access to some lines of credit and wound up paying a lot more under more stringent terms for other loans.

There is an air of familiarity these days.

The Wall Street Journal reported Wednesday that businesses are now paying the most in nearly a decade for some types of short-term borrowing. The Journal pointed specifically to the London interbank offered rate, or Libor, which had risen to its highest rate since November 2008. The uptick has been happening a long time — since late 2015 — but the pace has picked up.

2. Credit card crunch

Economists love to say all things are cyclical.

No one has to tell the credit card companies that. After years of easing restrictions, banks and other card issuers are battening down the hatches in a climate of rising rates.

Cards tied to the prime rate are rising automatically. But card companies also are closing long-dormant credit card accounts and raising rates for existing customers. Under current rules, customers aren't forced to accept the higher rate, They can choose between accepting the higher rate or closing their account in which they would have to pay off the balance and no longer have access to the credit line.

3. The student loan debt crisis

A recent analysis by the Brookings Institution maintained that problems with student loan debt are worse than previously believed.

Among other conclusions: two in five borrowers are likely to default within five years; graduates have accumulated $1.4 trillion in student loan debt, the largest single source of household debt after housing; and data suggests that nearly 40 percent of borrowers who entered college in 2004 may default on their student loans by 2023.

The specter of rising interest rates only compounds the problem, making it difficult for borrowers to consolidate their financial burden or refinance on cheaper terms.

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