Rising Interest Rates

Dec 2016


As expected, for only the second time since the Great Recession the Federal Reserve has decided to raise interest rates. The feds raised interest rates a quarter point and gave every indication that we would see more rate increases in 2017. One question I have frequently been asked is whether it is good or bad for ordinary people when the Federal Reserve raises interest rates. My answer is always that it depends, because in reality, rising interest rates are good for some people and not so good for others. It all depends on your situation.

The individuals who typically will be impacted negatively by rising interest rates are those who currently have adjustable rate debt and for those who are looking at borrowing money in the near future. There are many mortgages and credit cards offering adjustable rate interest plans. What this means is that when interest rates go up, so does your interest rate. As a result, those people with adjustable rate debt will see their interest increase at their next adjustment. Typically, adjusted rate mortgages will adjust once a year, where adjustable rate charge cards adjust more frequently. In addition, those people who want to borrow money in the near future will be faced with higher interest rates. For example, if you apply for a mortgage six months from now, I have no doubt that interest rates will be higher and as a result, you will be paying a larger monthly payment. Therefore, for Americans who borrow money, rising interest rates will be an issue that they have to deal with. On the other hand, there are also many winners as a result of the Federal Reserve policy.

If you’re an individual who likes to travel abroad, with the Federal Reserve tightening its monetary policy in raising interest rates, it’s more likely than not that the U.S. dollar will strengthen versus foreign currency. As a result, Americans traveling abroad will see that their dollar has more buying power than it did before and as a result, their trip will be more affordable.

Another group of individuals who will benefit from higher interest rates are those who save money in banks and such vehicles as CDs and money market accounts. Although I believe it will be a while before interest rates on CDs and money markets will rise, those who save in these types of vehicles will see higher returns in the not–so-distant future. Particularly for seniors who typically keep a good portion of their money in banks, rising interest rates provides a great sense of relief for them. After all, over the last decade or so with interest rates artificially low, it has disproportionately hurt our seniors.

Another group of people who may benefit from rising interest rates are consumers who purchase imported goods. With interest rates rising, it once again will strengthen the U.S. dollar versus other currencies. As a result, prices on imported goods should be less expensive, thus, helping consumers.

Even though interest rates are rising, a group of people who could also benefit are those who need to borrow money but cannot. In many sectors of our economy it has been difficult for people to borrow money for such things as starting a business. With higher interest rates, banks will now have a greater incentive to loan money. If banks do ease up and make it easier to borrow, it could spur economic growth which has been anemic in our economy as of late.

Rising interest rates can also be a benefit to stock market investors. As the Federal Reserve pointed out, they are returning to a policy of normalization and this may once again make stocks trade on their fundamentals. With interest rates artificially low, markets have been more difficult for investors to understand. A return to normalization could make the markets a little more predictable, which will help investors.

The bottom line is that in any move by the Federal Reserve regarding interest rates, there are going to be winners and losers. The key is that if you are going to be a loser from rising interest rates, look at ways to reduce the impact. That could be accelerating the payment of the debt or even converting an adjustable rate mortgage into a fixed-rate mortgage.

One thing everyone should keep in mind is that although interest rates are rising, it is not going to immediately impact the rates that were paid on CDs and money market accounts. It seems those rates don’t move until we have at least two or three interest rate increases. Although the Federal Reserve has said we will see those increases in 2017, there can be all sorts of reasons that the Federal Reserve backs off from that policy. Therefore, people have to take a wait and see attitude as to exactly how much interest rates will rise on savings accounts, CDs and money market accounts.

I always tell investors to never overreact to changes such as the Federal Reserve raising interest rates or even change in tax laws. Too many investors feel that when something happens they have to react. In many situations I tell investors the best course of action is to do nothing. Remember when making any investment decision don’t focus on what the stock market is doing or the direction of interest rates. The key is your individual situation and that should be the focus. What your next door neighbor may be doing may be great for your neighbor; it just may not be so good for you.

Good luck!