I got an email excitedly saying that I should be explaining how interest rate increases will affected younger investors and the personal finances of young people. I didn’t really think that was necessary, but it keeps popping up elsewhere with even more breathless writing copy, so it’s time for a real recipe for Federal Reserve interest rate hikes.

Interest Rates and Young People

Let’s start from the beginning. Neither interest rates, nor money, nor investments, care how old you are. It all works the same for every age.

That being said, it is true that interest rates have been so low, for so long, that anyone under 35 probably has never experienced higher interest rates. So, let’s go over what higher rates are like.

History of Interest Rates

First, remember that while the Fed has raised interest rates several times since December 2016, they have all been small 0.25% interest rate hikes. The current rate is 1.25% (technically, the Fed sets a range of 1.0% to 1.25%, but for graphing purposes, you’ll see 1.25%.) This is not remotely “high.”

In the 1980s, the Fed Funds rate was an astounding 18% to 20%, as they tried to reign in inflation, and shattered the economy along with it. The concept of “inflation hawks” being “better” than doves comes from memory of this period. The idea is that if you whack inflation soon enough, and hard enough, we’ll never see rates like that again.

Assuming we eliminate the 80s, then the 1990s saw a Fed Funds rate in the 4% to 6% range. You’ll hear a lot of people talk about these interest rates as “normal.”

From that perspective, interest rates are certainly still low.

What Low Rates Mean for Young People

Low rates are supposed to spur growth by making it easier to businesses to borrow money, as well as making it easier for consumers to borrow money. However, credit card companies really, really like to charge 18% or more for credit card interest rates, so they have long since made their card rates something like Prime (which is usually a few points higher than the Fed Funds rate) plus 13% or more to get them there.

In other words, if you have an adjustable rate credit card with an interest rate of 18%+, then you are already paying “high” interest rates.

Chances are, if the Fed Funds rate ever started pushing 4%, as those cards started charging 24%, they would either lower their rates back toward 18%, or the market would be flooded with lower rate cards.

The one place as a younger person you can be benefitting from low interest rates is with mortgages. Lower mortgage rates mean lower mortgage payments. However, studies show that people (young and old) tend to borrow as much as they can. This means that you likely have the same mortgage payment regardless of what the rates are. What changes is how expensive the house is you bought.

Savings and Low Rates

Although less talked about, another goal of low interest rates is to discourage savings. While saving is good for you, people spending money make the economy go around. The idea is that if someone looked at their savings account and saw it earning 10% they would be more likely to leave the money there than if the same savings account was earning 1%.

Of course, this does not account for the fact that most people save what they can, invest what they can, and spend the rest based almost entirely on their life goals. Whatever interest rate is available, they just take it.

Think of it this way, if you are saving up to go to Hawaii, then you are saving to go to Hawaii, not to earn 1.37%. Same thing with retirement. If you are putting 10% in your 401k (good for you), then you are putting 10% in your 401k, you aren’t choosing the 2.32% money market.

The real effect of interest rates on consumers comes from home equity loans and home equity lines of credit. If you can borrow the equity of your house at a low rate (low payment), then you are more likely to do things like remodel your kitchen. When you do that, you buy new appliances (economy wins!), hire workers (economy wins!), and buy new tables, chairs and decorations (economy wins again!)

This unfortunately, ends up tying the Fed’s interest rate decisions very closely to the real estate market which is what blew the whole thing up in 2007/2008. So, as the Fed raises rates again over the coming year or two, watch for very careful, very methodical increases that won’t affect much for the average young person other than their already high credit card interest rates, and maybe, a home equity loan decision.

Otherwise, maybe someday, you’ll know the joy of actually earning a worthwhile amount on a savings or money market account.