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What does the Federal Reserve Interest Rate Hike Mean to You?

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December 25, 2015

The Federal Reserve Raises Interest Rates

After several years, interest rates finally make a move.

By Andrew Rafal

‍The Federal Reserve announced last week that interest rates would rise, impacting just about everyone. For almost a decade, the Fed has held interest rates at historic lows, between 0 and .25 percent. Now, interest rates will increase to between .25 to .50 percent. So what does this mean?

This interest rate increase makes the U.S. dollar more attractive, although the Fed has indicated the increase will be gradual. The increase impacts a number of key savings and investment products, including bank CDs, stocks, bonds and fixed annuities.

Here is how they will be affected:

‍Bank CDs –

While banks may charge more to borrow money, the interest rate increase means they will have to pay out more on interest bearing accounts, which is good news for those who keep a large amount in cash.

‍Bonds –

When interest rates rise, bond prices fall, so bond investors may lose when bond prices drop. Those holding the actual bonds and stay invested until maturity will still earn their yield regardless of bond price fluctuation and will receive back heir original investment on the maturity date. Those who own bond mutual funds can in fact see the value of the fund lose value due to the rise in interest rates.

‍Stocks –

There is never a solid prediction of what stocks will do given an interest rate increase. Investors could become more confident about the economy, therefore allowing stocks to increase, or as lending costs increase for businesses and individuals, stocks could be negatively impacted.

Fixed Annuities –

Higher interest rates could mean more income from retirement dollars for those who create an income stream from annuities. Higher fixed-rate opportunities could become available in fixed annuity options that pay a flat rate for a fixed period of time.

Those who plan to borrow money for large purchases such as a home or car, or those who maintain higher credit card balances, won’t be too thrilled with this rate increase. But while the cost for loans will increase slightly, they will remain affordable.

The rise of interest rates is not necessarily a bad thing. For the last several years, investors approaching retirement have had to choose between savings vehicles with nominal return or volatile equities. Given this interest rate increase, fixed income investments will become more appealing and savings accounts will earn more, allowing retirees along with safe money investors to reap the benefits.

With changes such as an interest rate increase, it is important to make sure you have a long-term plan in place. It’s always a good idea to meet with your financial professional regularly to review your financial plan and strategy to make sure it is in line with your goals and retirement needs.

If you have questions or would like a review of your current plan and strategy, schedule a call with one of our advisors.

Andrew Rafal and his team at Bayntree proactively addresses market changes to ensure clients’ opportunities are maximized. With it’s headquarters in Scottsdale, Bayntree Wealth Advisors is a nationally-recognized financial advisory firm that specializes in developing customized financial strategies to help clients reach their long-term goals.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance on your individual situation

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