How Higher Interest Rates Will Affect Your Wallet
After going nearly a decade without raising interest rates, the Federal Reserve looks like it’s finally going to pull the trigger, said Marilyn Geewax in NPR.org. The federal funds rate—the interest rate at which banks lend money to one another—has been near zero since 2008. But after a stronger-than-expected October jobs report, which has boosted confidence in the strength of the economy, analysts put the chances of a rate hike at the Fed’s December meeting at 70 percent. Since the federal funds rate is used as a benchmark for everything from credit card interest rates to mortgage rates, “this huge decision could affect virtually all Americans who borrow money.”
The Fed’s decision will mean a lot for your wallet, said Janna Herron in TheFiscalTimes.com. The era of near-zero rates has been exceptionally friendly to borrowers, with cheaper credit cards, home equity loans, and mortgages. Fixed-rate loans and mortgages won’t be affected if the Fed decides to act next month, but adjustable-rate mortgages and interest on most credit cards will likely rise in tandem with interest rates. Higher credit card rates, however, will apply only to new purchases. Savers should start to see better returns, with higher rates on certificates of deposits, money market accounts, and savings accounts. But the Fed is expected to raise rates very gradually—just 0.25 percent at first—so “there’s a long way to go before rates hit the 5 percent glory days.”
Investors, “fasten your seat belts,” said Jean Chatzky in Fortune.com. If history is any guide, the stock market won’t take kindly to rising interest rates. From 1966 through 2013, the S&P 500 enjoyed annual returns of more than 15 percent when rates were trending downward. When they were trending up, the average return was just 5.9 percent. “It isn’t so much the level of interest rates that matters,” says Robert Johnson, co-author of Invest With the Fed. “It’s the direction and the trend.” Young investors likely have plenty of time to ride out the volatility. But older investors near retirement should consider cutting back on risk and “beefing up” their cash position.
“There will be places to make money, though,” said Matt Krantz in USA Today. Savvy investors should “tear up the playbook that has basically been printing them money the last few years” and learn to win with a new one. Some sectors—like utilities and some real estate investment trusts—are already taking a hit in anticipation of higher rates. Bank stocks, however, are on the upswing at the prospect of higher interest rates being charged on loans. Energy, consumer goods, and food stocks also tend to perform well as rates rise. Either way, the investment climate is about to change dramatically. “This is not the time to fight the Fed.”
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