What impact will higher interest rates have on you?
And how many more increases are coming in 2016?
Last month, the Federal Reserve raised interest rates for the first time in almost a decade, a move that Chair Janet Yellen said would be followed by “gradual” tightening as officials watch for signs of higher inflation.
The rate hike has been a topic discussion throughout the nation for quite some time. The markets now have clarity, but it has also raised a few questions.
How is the announcement impacting the market?
Expect some short-term market volatility in the coming weeks as investors acclimate themselves to the hike. The question of how many hikes will likely come up this year and when they will be announced is especially important as many have become comfortable with a zero interest rate environment.
The Federal Reserve has stressed that they intend to move gradually and in small increments, and will pull back if the economy falters, tempering the impact on consumers and businesses. Some economists believe that interest rates may be increased as many as three more times in 2016.
How will this impact consumers?
The initial interest rate increase is likely to have minimal impact on the average consumer and most household budgets will not be affected. We are still at historically low interest rates; therefore, we need to keep this in perspective. A quarter point doesn't take us far from historically low rates; it's a small step and will not have a dramatic economic impact.
If, however, the Federal Reserve raise rates a series of times, then consumers may see increases to their mortgages, bank savings rate and corporate bonds.
For credit card holders – as most Americans are today – this could affect your current balance if you carry a sum month to month. It would make paying off balances longer and costlier. However in most cases, consumers often receive a fixed promotional rate when they first sign up. So many will not see their balances affected until the promotional period ends.
Borrowing to buy a car or a home could also be more costly in the coming months and years. If you’re planning on taking out a large loan, the potential for more rate hikes is worth considering.
When reviewing your portfolio for the New Year in light of the interest rate announcement, avoid any knee-jerk reactions and keep the bigger picture in mind. Consider having a conversation with your financial advisor if you have any questions or concerns.