Last Wednesday, the Federal Reserve (Fed) raised the base interest rate (or the amount it charges member banks to borrow money) by 0.25%, bringing it to a range between 1.50% and 1.75%.
After years of no movement, the past eighteen months have seen six rate hikes (December 2015; December 2016; March, June and December 2017; and March 2018).
The Fed raises rates only if and when it feels the U.S. economy is well-positioned to handle it, and all signs point to continued economic expansion: unemployment remains at near-historic lows, the housing market is still hot (despite the rising cost of mortgages) and consumer sentiment, which had slumped earlier in the year, is picking up again.
Don’t Fight the Fed
Wednesday’s rate hike was the first monetary-policy action taken under newly-appointed Fed Chair Jerome Powell. While this rate hike was widely expected, the bigger question was whether the Fed would increase rates more sharply (or more often) than previously thought, especially under the new regime.
The Fed said that it doesn’t see a need to raise rates more than the previously-projected three times in 2018; it does, however, foresee a sharper rate-hike trajectory, beginning in 2019. The changes in rate-hike projections for 2019 and 2020 are a result of improved expectations for economic growth.
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Savers Rejoice, Spenders Despair
If you’re a retiree or a saver, the good news is that you’ll probably stand to benefit from rate hikes. That’s because interest earned on short-term investments, such as certificates of deposit and savings accounts, gets a boost when rates rise.
The bad news? When interest rates rise, borrowing costs also increase. More older Americans are carrying higher levels of debt. The University of Michigan’s Health and Retirement Study reveals that 40% of households aged 62 to 66 reported credit-card balances in 2015.* Credit-card debt is highly rate-sensitive, so you will feel an immediate impact if you’re carrying a balance on your credit cards…which means that now is the time to pay down that debt.
Bond Market Math
Many older investors have a significant portion of their portfolios in bonds or bond funds. Rising interest rates impact these investments, too. The prices of existing bonds fall as interest rates rise because new bonds offer better rates than older bonds.
Wondering what the most appropriate bond holdings in this rising-rate environment are for your portfolio? Leave a comment below or send a confidential message to one of our experienced financial professionals by clicking here!
*the most recent data available