Indiana News

How an interest rate hike could impact your money

INDIANAPOLIS (WISH) – For the first time in nearly 10 years, the Federal Reserve could raise interest rates on Thursday.

There has been talk of raising rates for years, but this is the first time many experts think the Federal Open Market Committee may actually raise rates.  The Fed has kept interest rates near zero since 2008, when it lowered rates to help boost the economy.

Experts are split over whether or not the rate hike will happen. Since 2008, the United States has seen unemployment go down, and other positive signs the economy is on the right track. But there’s also concern of slow growth.

The global slowdown and volatility in the financial markets could be reason for the Fed not to raise rates. If the Fed does decide to raise rates, it will likely be a very small increase. Most experts believe it will be a .25 percent rate hike.

Many people will be most concerned about how a rate hike will affect mortgages, because mortgage rates have been at historic lows for several years.

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“If the Fed does raise interest rates we can expect some of that to show up in higher mortgage rates. It wont be a large impact, and it may be a little bit delayed,  but eventually we may start to see higher mortgage rates,” said Robert Neal, a professor at Kelley School of Business, who used to be an economist at the Federal Reserve.

A rate hike could affect debt that does not have a fixed interest rate. That means you could be paying more in interest on many credit cards. Interest may also change on some of your private student loans. If you’re shopping around for a new car, expect to see those interest rates go up as well.

This is also a big decision for the financial markets. Neal warned investors not to be spooked be the Fed’s decision – whatever it may be.

“If we observe these periods of high volatility as investors – we should try and ride it out and not get caught up with trying to figure out what’s going to happen, and making major buy or sell transactions in advance of that,” said Neal.

24-Hour News 8 asked Wells Fargo Advisers about what this means for investors. Here are the firm’s notes:

  • Investors with allocations in cash and cash alternatives could see returns for risk-free assets slowly move higher: Since the financial recession, many investors have chosen to hold an outsized allocation to cash and cash alternatives. Some investors have been concerned about locking in historically low interest rates in fixed-income investments while others are looking to avoid market risk and volatility or simply to store more away for a rainy day. Given the slow pace of expected rate increases, investors in cash alternatives should not expect returns that will offset inflation in the near term. We continue to encourage investors to examine their cash alternatives holdings and, where appropriate, systematically invest those excess allocations in the market.
  • Retirees and fixed-income investors may be able to take less risk to generate income from their portfolios: If you have money on deposit or in short-term fixed-income investments, rising interest rates are generally a good thing. Income investors have had a tough go the past six years with low interest rates. In some cases, investors have extended their credit and interest rate risk to gain greater yield and income over the past several years. With higher interest rates, investors should not need to take on as much of these risks in the future.
  • Fixed-income investors should use caution regarding exposure to securities with long-term maturities: As interest rates increase, bond prices tend to fall. With the potential of negative price returns, investors in search of better opportunities may be considering significantly reducing or eliminating their fixed-income allocations. Before making a move, we encourage investors to consider the total-return picture and their portfolio’s diversification strategy as well as their risk tolerance for market volatility and any future cash needs.
  • Stock investors should continue to see growth in the equity market but with increased volatility: If you look at the historical data for when the Fed has raised rates in prior cycles – before, during, and after the rate hike – almost all of those times the S&P 500 Index went up. Remember that when the Fed does decide to raise rates, it’s saying, “The economy is actually on better footing.” In some ways it’s counterintuitive: The Fed will not raise rates unless they feel the economy is strong enough to withstand higher rates, and a strong economy is generally good for stocks.
  • Borrowers are likely to see their costs increase: Over the next year or two, mortgage rates may move higher. For other forms of borrowing, such as credit cards, auto loans or home equity lines and other consumer loans with a floating rate, the debt payments could also move higher. That may be a surprise for some borrowers after six years with almost no increase in low variable rates.

Before making any decision about your money, you should consult your financial adviser. The Fed will release its statement at 2 p.m. Thursday and Fed Chair Janet Yellen will speak at 2:30 p.m.

24-Hour News 8 will keep you updated.