Interest rates are on the rise again. After keeping them at or near zero for close to a decade, the Fed has decided to start raising rates. 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
According to Fed Chairman Jerome Powell, there could be more increases in the future. He recently said there’s a long way to go before rates hit neutral, which is the rate considered appropriate for current economic conditions. 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 the rate banks use for overnight lending to other institutions. It influences nearly every instrument that uses interest, such as savings accounts, certificates of deposit, credit cards, loans and more. As you might imagine, an increase in the federal funds rate generally leads to an increase in overall interest rates.
You might be concerned about what increased rates will mean for your investments or financial strategy, especially if you’re retired or nearing retirement. Will increased interest rates lead to market declines? How will increased rates affect your outstanding debt? Below are a few things to consider as you review your investment strategy and your financial plan:
Banks may offer more competitive rates to savers.
Savers have been dealing with low interest rates on savings accounts, certificates of deposit and more for some time. However, things could change. An increase in the federal funds rate usually leads to increased rates elsewhere, especially at banks and other financial institutions.
It may not happen overnight, but it’s likely that interest rates will start to increase at your local bank soon. It may be worthwhile to shop around before you open your next savings account or CD. You may see banks being more competitive in their efforts to attract new deposits.
Also, if you’re looking for a secure vehicle with a fixed interest rate, talk to your financial professional about a deferred fixed annuity. They offer tax-deferred growth along with competitive interest rates.
Rates on debt could rise.
Debt accounts that have adjustable rates could soon be vulnerable to increases. That includes things like credit cards and lines of credit. If you hold those types of accounts, now may be the time to pay down those balances. Adjustable rates often rise in line with increases to the federal funds rate. You could see your payments increase soon.
Also, if you’re looking to refinance your home or take out a mortgage for a new home, consider your timeline. Mortgage rate increases are often gradual and take time, but they do happen. An increased rate on your mortgage could lead to higher payments or reduced purchasing power.
The financial markets could experience fluctuation.
Any interest rate movement can have an impact on the financial markets, particularly the bond market. Bond yields may increase, which means bond prices could fall. That could also impact stock markets as investors decide where to allocate their funds.
However, it’s nearly impossible to predict exactly how markets will be affected in the short term. It’s never advisable to try to time the market or predict winners and losers from any kind of financial uncertainty. You may want to review your long-term strategy with your financial professional to make sure it’s still in alignment with your goals and needs. However, resist the urge to make substantial, abrupt changes to your plan.
Ready to review your investment strategy? Let’s talk about it. Contact us today at Jim Lee Financial. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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