on April 4, 2017
When people hear about the Federal Reserve raising interest rates, they often start to get nervous.
They wonder how a rate hike might affect them, or their children. They may consider expediting a decision to buy a home. They sometimes worry about their investments in the stock market and wonder if they are stable and secure.
What does this particular rate hike or series of rate hikes (according to CNN Money, Fed leaders plan to raise rates three times this year) actually mean to you? Does it matter?
My short answer: Not much.
If you look at the grand scheme of things, we’re in a time of remarkably low interest rates. Between 1971 and 2016, the average interest rate was 5.81%, and that includes seven years of near-zero rates. Today, we’re sitting at 1%. I like to think of this rate (and the rate for the past 8 years or so) as artificially low. We’re nursing a sluggish economy back to health.
Also, the Fed is likely only going to raise interest rates by increments of .25%. If you’re taking out a new mortgage or if you have an adjustable-rate mortgage, you will be affected, but not by much. In the end, a .25% rate hike will only cost you a handful of dollars in the long run (there are plenty of mortgage rate calculators online if you’d like to crunch the numbers).
Not to mention, a higher federal funds rate is not always a bad thing. In fact, it can actually benefit certain people. Those who have socked their money away into savings accounts, CDs, or money market accounts will see an increase in the interest they’re earning on those accounts. For the past several years, those who have made these safe investments have seen very little reward for their savings.
Not everyone, of course, benefits from a federal rate hike. If you’re thinking about taking out a small business loan, buying a new home, or refinancing, you may want to act soon before any more increases take place. But don’t be hasty! If you’re not quite prepared to make a major life decision, it is better to sit tight and pay a few extra dollars down the road.
One thing to keep an eye on, however, is your credit card interest rate. Interest on credit card debt often increases with the federal funds rate and credit card companies are not obligated to notify you. I am a huge proponent of paying down credit card debt, regardless of the federal interest rate! It’s one of the best ways to secure a stable financial future (more on that topic in my book, Self-Wealth).
So, what’s the bottom line? Some areas of your life may be affected by a federal rate hike, but you’ll hardly feel the difference. As we edge our way back to a normal federal funds rate, don’t panic! Talk to your financial advisor and create a sustainable, long-term strategy that will weather any little ups and downs in the market, or personal bumps in the road.
If you’d like additional advice, please don’t hesitate to contact me personally! I’d love to chat.
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That suggests that the central tendency of the Fed’s rate projections will prove to be too low this year.
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