After nearly a decade of low interest rates, the Federal Reserve is taking action. The Federal Open Market Committee has raised the federal funds rate three times this year, with the most recent increase taking the rate to 2.25 percent.1 The Fed started raising rates in December 2015 and has accelerated increases this year as the economy appears to have fully emerged from the 2009 financial crisis.
According to Fed Chairman Jerome Powell, current rates aren’t close to neutral, which is the rate considered appropriate for current economic conditions. That means more rate hikes could be coming soon. The Fed’s own outlook indicated the neutral rate could be anywhere from 3 percent to 3.4 percent.2
The federal funds rate is an important leading indicator of overall interest rates. Banks and other financial institutions use the federal funds rate for overnight lending to other institutions. That means it’s used as a basis for rates on a wide range of financial vehicles, including savings accounts, certificates of deposit, credit cards and more.
If you’re nearing retirement or already retired, you may be wondering what these rate hikes will mean for your financial future. What does it mean for your strategy? How will the rate increases impact the financial markets?
There are no easy answers to these questions, as it’s difficult to predict the financial future. However, past periods of interest rate increases can offer a glimpse into what may happen. This could be a good time to analyze your strategy and review it with your financial professional.
Savings rates may go up.
If you’re a saver, you’ve probably been frustrated with interest rate levels for some time. Rates on savings accounts, certificates of deposit and similar vehicles have been at or near zero for years. However, a higher federal funds rate could lead to higher deposit rates at your local bank.
You may not see the rate increase overnight, but it will likely happen eventually. Shop around for rates, and take advantage of institutions competing with one another for new deposits. Also, consider an annuity with a fixed interest rate. These vehicles combine predictable, competitive interest rates with tax-deferred growth, so they could play an important role in your strategy.
But debt rates could too.
Debt is always problematic in retirement, but it could become especially challenging if it has an adjustable interest rate. You may see those rates and the related debt payments increase in coming months. If possible, think about ways to pay down those debt balances or even consolidate them into something with a fixed rate.
Also, consider your schedule or timeline if you’re looking to purchase a new home or refinance your mortgage. Mortgage rate increases are often gradual, but they do happen, especially if other rates are increasing. An increased rate on your mortgage could lead to higher payments or reduced purchasing power.
The investment markets could fluctuate, but that isn’t necessarily a bad thing.
Interest rate increases could affect the financial markets, but it’s difficult to predict exactly what the impact may be. Bond yields may increase, and bond prices could drop. Some investors may move from the stock market to the bond market to take advantage of new opportunities.
However, the financial markets are influenced by a wide range of factors. It’s nearly impossible to predict market performance, especially in the short term. Your strategy should be based on your unique needs and goals, not on short-term changes to the overall economy. While it may be time to make gradual changes to your strategy, resist the urge to make a drastic, emotional change. Your financial professional can help you examine your strategy and determine if a change is needed.
Ready to review your investment strategy? Let’s talk about it. Contact us today at Financial Solutions Group. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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