The seventh interest rate hike since last summer has just occurred, and even the long-term rates are beginning to absorb the increase. The impact on the consumer also begins to be felt, and some categories are going to be more hurt than others.

Rates on fixed-rate mortgages are bound to rise, to finally remove Alan Greenspan’s confusion when he called the persistence of low long-term rates, such as mortgage rates and long-term bond yields, after a series of hikes in the Fed funds rate a «conundrum» in congressional testimony on Feb. 16. Greenspan suggested that this was a «short-term aberration», as the average mortgage rate dropped to 5.59% on Feb. 9 from 6.3% on June 30 when the Fed embarked on its long journey of measured increases from the historically low 1% rate.

Now the average rate on the 30-year fixed rate mortgage has passed the psychological threshold of 6%, and almost analysts almost unanimously forecast further increases during the year. Fixed mortgage rates move in lockstep with long-term Treasury bond yields, and these are typically lagging behind the Fed interest rate movements. The yields on the bonds can be, however, propelled by a rise in inflation and the danger of the loss of appetite for US assets with foreign investors. If the foreign central banks, mostly Asian, get tired of financing US trade deficit, the yields on Treasurys may have to go up, dragging upward mortgage rates.

Borrowers with adjustable-rate mortgages are in a more serious situation: the rates on their mortgages are ties to short-term indicators, such as LIBOR, the one-year Treasury or the 11th District Cost of Funds. That is why many ARM holders are in for a nasty shock at the next rate adjustment. One who took out a loan at 4% when the rates were near their lowest point, can have the rate adjusted to 5.8%. The first rate adjustment on some ARMs can be as high as 5%, so some of the consumers need to brace for a steep increase in payments.

Interest-only loans are even more bumpy and are likely to stage even greater jumps in payments as their payments are composed only of the interest in the initial period of the loan term. With interest-only mortgages, a borrower can opt for minimum payments to offset the increase in rates. This, however, can create a situation when the payments are not enough to cover the interest due on the loan, and the balance is de-facto growing over the years.

The main point of the rate rise is clear: Americans finally need to start saving more and spending less. Boosts in the rates rewarding the savers are one more incentive to switch to saving instead of borrowing.

Thus, rates on Certificates of Deposits (CDs) that fluctuate in consonance with Treasurys of similar maturity will move upward along with broader rate moves. The rates are now approaching 3.7% in comparison to 3.48% in November, following the rise in long-term Treasury rates. Yields in money market accounts (MMAs) have shown meager improvement, with the rate of 0.57%, still way under the current inflation rate of 2.9%, but rates on money market mutual funds (MMMFs) have posted steady increases as funds sell instruments that reach maturity and roll funds over into higher-yielding investments.

Will Americans respond to the challenge, changing their habits from spending to saving? Consumer debt has been growing at a record rate in the US, sparking worries of the looming defaults and burst of the housing bubble. Even so, if mortgage rates do not post sharp increases and remain under 7%, the housing boom will continue, and real estate will keep attracting investors. The US mortgage debt that hovers around $7 trillion, is, in Greenspan’s words, a reliable barrier against the bubble, when compared to the $17 trillion American households are worth. A jump in rates, however, could prove dangerous, triggering an avalanche of defaults and a rapid cool-off in the property market.