Asad Gourani, CFP®
What the latest Fed rate hike means for your money
Updated: Jan 18, 2021
The Federal Reserved raised rates once again in September, indicating the economy and job market continues to show strength. A rising interest rate environment points to a healthy market, but what many retail investor see are rising consumer loan rates. It is a double edge sword because if rates were to be kept low, it may signal a weakening market. That being said, here are the impacts rising interest rates will have on you. Rising Loan Rates As alluded to in the introduction, for those of you that carry bank notes and variable interest credit cards, your payments may increase due to the rising interest rates. This will end up costing you more in interest payments over the remaining life of the note. One way to avoid being impacted by rising interest rates if you have debt is to ensure your interest rates are fixed. Variable interest rates several years ago were appealing because rates were near zero. Return On Savings In recent years, the drawbacks of low interest rates are products such as CD’s and savings account have not been able to keep up returns. One of the benefits to rising interest rates for investors are returns on Certificates of Deposit, or CD’s are increasing. Naturally, these vehicles are slow to return to previous highs as they attract limited attention due to the investment nature and limited risk. Regardless, having a slight uptick in these investment vehicles will bring a welcomed boost of energy. Rising Mortgage Rates If you are looking into purchasing a home and need to take out a mortgage, rates are going to continue increasing as long as the Fed keeps raising rates. This will affect everything from a 30-year fixed down to a 15-year variable. For those that have existing loans, if you have a fixed interest rate then you are likely immune to the rising rates. However, if you have an adjustable rate you will begin seeing your payments increase ever so slightly. Should you find yourself searching for a stable rate, a fixed mortgage will bring a fixed interest that may be slightly higher than a variable, but will stay in place for the life of the note. Stock Market Lastly, the rising interest rate environment could very well have an impact on the markets in terms of increased volatility and a change in fundamentals. To give a simplified picture, as rates keep rising borrowing costs for companies would increase which would affect their earnings, as well as the increase in yields on bonds would make them more and more attractive to investors. When building a portfolio, you should be diversified so when rates increase it has minimal impact on your overall objective. Regardless, when the interest rate is increased, that can be used as a trigger to take a look at your portfolio and see if everything is well. Also, when rates are increased this should not be a trigger to run and liquidate positions or irrationally adjust. The market has known these rate hikes were going to happen for quite some time, so it should come at no surprise. It would be a different story if these were surprise rate hikes.