Unemployment is at its lowest level in years.1 Many Americans are seeing a bump in their paychecks due to the new tax law, and the stock market is remaining resilient in the bullish market.
What could go wrong?
Inflation, for one, which is why the Federal Reserve has been raising interest rates. As part of its mandate to manage inflation, the Fed’s Federal Open Market Committee (FOMC) is expected to continue its incremental increases in the federal funds rate throughout the year and possibly into 2019.2
Fortunately, we generally know ahead of time when the Fed is going to make a move. Not only is the agency transparent in communicating the likelihood of future monetary policy actions, it generally offers a comprehensive rationale as to why it plans to make changes. These comments are publicly available and widely referenced.3
Some individuals may be interested in strategies to help take advantage of higher interest rates. However, we recommend considering your financial objectives. For example, are your goals to minimize the effect of rising rates on your current holdings, maximize portfolio performance generated by higher interest rates, or both? Consider whether you’re already on track with your financial goals and current asset allocation, and whether changes could increase your risks unnecessarily. If you would like help answering these questions and evaluating how rising interest rates may affect your financial strategy, please give us a call.
Higher interest rates increase the cost of borrowing money, resulting in reduced spending and slower economic growth. Homeowners with adjustable-rate mortgages, home equity lines of credit and other loans with variable interest rates will initially be the most affected. Eventually, higher rates also tend to raise interest on credit card purchases and balances.4
The Fed’s advance warning of rate hikes gives consumers the opportunity to review their finances for possible side effects. For example, a homeowner may decide to refinance from a variable to a fixed-rate mortgage, or a credit card holder may decide to pay off the balance while rates are still low.5
By the same token, higher interest rates usually mean higher rates for conservative savings vehicles, such as bank deposit accounts and CDs.6 For retirees and near-retirees, higher rates offer the opportunity to tuck funds into a low-risk account with a competitive interest rate.
1 Bloomberg/Fortune. May 4, 2018. http://fortune.com/2018/05/04/unemployment-rate-century-low-percent/.“The U.S. Unemployment Rate Is Now the Lowest It’s Been This Century.” Accessed June 14, 2018.
2 Akin Oyedele. Business Insider. March 21, 2018. http://www.businessinsider.com/how-the-fed-raises-interest-rates-2017-12. “The Fed just raised interest rates – here’s how it happens and why it matters.” Accessed June 4, 2018.
3 Robert Johnson. The Hill. April 3, 2018. http://thehill.com/opinion/finance/381278-no-need-to-fret-about-interest-rates-when-you-can-just-listen-to-the-fed.“No need to fret about interest rates when you can just listen to the Fed.” Accessed May 18, 2018.
4 Kate Duguid. Reuters. March 21, 2018. https://www.reuters.com/article/us-usa-fed-households-explainer/what-the-federal-reserve-rate-hike-means-for-u-s-households-idUSKBN1GX2BZ. “What the Federal Reserve rate hike means for U.S. households.” Accessed May 18, 2018.
5 Emmie Martin. CNBC. March 23, 2018. “The Fed just raised interest rates—here are 4 steps you can take to protect your money.” https://www.cnbc.com/2018/03/23/4-things-to-do-with-your-money-when-the-fed-raises-rates.html.“The Fed just raised interest rates—here are 4 steps you can take to protect your money.” Accessed May 18, 2018.
6 Stan Choe. USA Today. May 18, 2018. https://www.usatoday.com/story/money/personalfinance/2018/05/18/rising-rates-savers-sigh-relief-borrowers-beware/622393002/.“Rising interest rates: Savers sigh in relief, borrowers beware.” Accessed May 18, 2018.