Despite the Federal Reserve’s announcement today that it will hold interest rates steady, a US rate hike is almost certainly coming (paywall) before the end of the year. That’s great news for Baby Boomers, but terrible news for their Millennial children.
The Fed’s rock-bottom interest rate policy, aimed at stoking economic growth, hasn’t been easy on savers heading into retirement, whose earning years are mostly behind them. Historically low-interest rates have made safe investments with decent returns harder to find, and pushed more Boomers into riskier assets. More than one-third of Americans between ages 51 and 69 were overexposed to stocks, according to a 2015 Fidelity study, and 10% of them had all their 401K savings in stocks.
As Quartz’s Allison Schrager recently pointed out, the returns on safe investments like bonds and annuities have plummeted in recent years, since those assets are more expensive when yields are low. In 1996, $1 million in savings in a 20-year fixed nominal annuity would have bought about $83,000 a year in income. This year, that same annuity would have cost roughly $1.47 million (as of July 14), she estimated.
“Baby Boomers are going to like seeing higher interest rates,” Bob Johnson, CEO of the American College of Financial Services, told USA Today. He explained that rising interest rates will boost returns on safe investments popular among retirees, including CDs and money market accounts.
For Millennials, the outlook is much bleaker. “For the Millennial generation, there’s not a lot of good news,” said Johnson.
That’s because a Fed rate hike will mean higher interest rates on auto and mortgage loans, not to mention the federal student loan rates, which will adjust next summer in response to a Fed rate hike.
Normally, people planning to take on debt in the coming years—especially young people with the bulk of their savings years ahead of them—would be scrambling to lock in those loans within the next three months, before a potential rate hike in December.
That may not happen, if the spending habits of Millennials hold. Last year, the average age of first-time US homebuyers reached its highest level in 60 years, thanks largely to high student debt and a tight job market. Young adults in the US have also been living in a low-interest rate bubble for most of adulthood, so the prospect of living under higher interest rates may fall on deaf ears. That they have taken refuge from reality by moving back home probably won’t help.