Nowadays, interest rates are low and stable compared to the relative highs of previous decades. As the economy has gradually recovered from the 2008 recession, the Federal Reserve Board (the Fed) has sought to keep rates low and encourage borrowing, growth, and active investment participation.
However, since 2015, the Fed has begun to raise rates in an effort to encourage saving and prevent rampant, excessive growth. On March 3, 2017, the chairwoman of the Federal Reserve – Janet Yellen – declared that further increases may come later this month.
“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate,” Ms. Yellen said.
Is this the right move for the Fed to take? How will this affect the economy as a whole? And how will it affect you?
Retirees and Savers May Earn More From Interest
Rate boosts should introduce higher returns on savings accounts such as money market accounts or certificates of deposit. If you’d like to live on your savings during retirement, higher rates may be able to help out. You may not be able to notice much of a difference now but, assuming rates continue to rise, you should be able to see modest increases on returns in the latter half of the year.
However, higher rates can also harm the average 401(k). Because higher rates require companies to spend more money on borrowing, they can slow companies down which leads to a slower economy, less investing, and as a result, weaker 401(k)s. Keeping a diverse portfolio should allow you to manage these kinds of issues.
Lending Should Come Easily
In the aftermath of the recession, lending came to a severe halt. Although banks are more willing to part with their money nowadays, they will be even more likely to give out loans once interest rates rise. They may take more risks, but they’ll only do so because they know they’ll make more in exchange. Getting a loan after a rate hike might be easier, but the loan itself will also be more expensive, therefore excluding people who don’t want to pay more interest.
In theory, this move may also increase economic growth. As a whole, the economy has stagnated a bit more than expected – but, with more lending on the horizon, this may soon change. Hopefully, these rate hikes won’t lead to a correction.
Home Values Should Rise
Higher home mortgage rates often follow a federal rate hike. In turn, many prospective homebuyers will likely take the risk and buy new homes before these rates rise too much. If you’re looking to buy a new home, now is the time to act. Increased demand also means that home values will rise, so if you’re content with staying in your current home, you may see it rise in value.
Credit Cards May Have Higher Interest Rate Costs
It may take time for savings accounts to see benefits, but credit card users will see rate hikes immediately. As rates continue to climb, generous balance transfer offers will become few and far between, so you may want to act fast if your bank isn’t keeping up with the competition.
Auto Loan Rates May Rise
Rate hikes tend to accompany a common trend among major purchases – more expensive loans. Like homes, credit cards, and business loans, auto loans will also be expected to rise in the coming months as rates continue to go up. However, for the most part, you probably won’t notice a few small increases on car payments.
Stocks May Become Volatile
A rate hike could make stocks less attractive for investors. With more rate hikes on the way, 2017 may not allow investors to see such tall gains like they have in recent years. Rising interest rates will also affect bond prices. When interest rates rise, bond prices fall. And when interest rates fall, bond prices rise. Depending on the maturity of the bond, it may fluctuate substantially or hardly at all.
The Bigger Picture
By influencing stock and bond prices, consumer and business spending, recessions, and inflation, the Fed can have a massive impact on the economy and keep it in balance over long periods of time. However, because the economy tends to lag behind and slowly adjust to these changes, the effects of these new rate increases may not be felt right away. If you’re not sure how these rates might affect you and you would like to learn more, we recommend that you speak with a licensed financial professional.