Market Analysis

Rates on the Rise…Again

by Alli Thomas

Mar 27, 2018

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

Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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