What the Rate Hike Means to You


December 21 2015

With the Federal Reserve raising interest rates for the first time in almost a decade, it’s natural to ask how it will affect you. The 0.25 percent increase the Fed announced last Wednesday is so modest it shouldn’t impact most individuals significantly. On the sunny side, the hike is a show of confidence that the economy is strengthening, thanks to a falling jobless rate.

But the economic outlook is still guarded, with little inflation, the slump in oil, stagnant consumer prices and a lack of consistent wage growth. Consequently, Fed Chair Janet Yellen has repeatedly indicated future rate increases will be gradual. Raising rates also provides the option to lower them if the Fed wants to stimulate the economy in the future.

Traditionally, savers profit and borrowers lose during periods of rising interest. Mortgage rates may eventually rise, but they are indirectly impacted by short-term rates and more influenced by economic growth and inflation expectations. Except in areas where home prices are already stressed (such as northern California), the broader housing market shouldn’t be upset by any minimal increases that could occur from this first bump. Of course, payments on existing adjustable mortgages may grow with this and future boosts.

As additional adjustments are made, consumers may pay more on auto loans and credit card balances. Sustained increases could also mean growing payments for individuals who took out variable student loans or refinanced to variable rate loans.

Since many segments have already responded in anticipation of the Fed lift-off, the stock market isn’t expected to react dramatically to the rate hike alone. That being said, stocks with high returns, minimal volatility, elevated margins and stable track records historically outperform lower quality counterparts immediately following a rate rise. Shares in financial companies may increase as banks realize higher margins between the interest they pay depositors and the interest they charge for loans. Higher interest is often bad for longer-dated corporate bonds but high-yield and municipal bonds may benefit from an improving economy. Money market yields can be expected to grow.

While last week’s move is expected to produce limited effects, it underscores the importance of a properly diversified portfolio to address your situation. Give us a call if you’d like to re-examine your investments in light of the current environment. Call your Centennial Colorado Investment Advisor Representative Jordan Dechtman at 303-741-9772, email him at Jordan@JordanDechtman.com visit our website at www.JordanDechtman.com to schedule an appointment.

Written by Securities America for Distribution by Jordan Dechtman.