It’s quite possible the Federal Reserve will decide next week to start raising interest rates. It hasn’t done so since June 2006, electing to keep short-term rates at historic lows to help pull the economy out of the Great Recession and set it back on the path toward normalcy.
If it does raise rates, the tiny 0.25% hike will be more symbolic than anything else, but the market is certain to feel the reverberations.
Far too much ink has already been devoted to the topic of interest rates and the next Fed move, but here’s a very short summary of what the possible rate hike could mean to you:
Don’t be alarmed. When rates do go up, they will go up very slowly and gradually. The global economy isn’t strong enough to support dramatic moves, and sudden hikes could sink U.S. exports and currency flows. Most experts foresee a very long period of lower than average interest rates.
In the aggregate, a rate hike is a vote of confidence for the economy. “The announcement will be akin to a doctor’s decision that a patient is well enough to be gradually taken off medication,” writes Kevin Granville of the New York Times.
Bank deposits. You might earn a tad more on your bank deposits, but it will take many, many months before interest cracks the 1% ceiling. Keep enough cash on hand to meet your short-term spending needs, but don’t be deceived into thinking cash is an investment. It’s not.
Variable rate loans. If you owe money on variable rate loans (like a home equity, credit cards, or student loans) your payments could start nudging upward. It’s not an emergency, but do start thinking about your eventual payoff strategy.
Stock and bond markets. Higher interest rates may cause some gyrations in the stock and bond markets. Bond prices slide down when rates go up, so you lose a little on bond values but make it up eventually in higher interest payments. Surprisingly, stocks often do well in an environment of gradually rising rates, as they normally coincide with stronger economic activity and corporate earnings. “Investors, however, should brace for potential volatility as the Fed initially hikes rates,” advise investment strategists at J.P. Morgan. The best defense, they say, is to maintain “a well-balanced and diversified portfolio” which is also our strategy.
If not now, then when? Just in case the Fed doesn’t do the deed next week, the next opportunity to raise rates will be at the January or March 2016 meetings. The downside? We’ll be reading far too many more news stories about the Fed and interest rate hikes for several more weeks!