In June of 2017, the Federal Reserve announced it will continue on its slow and steady path of interest rate hikes with another 0.25 percent increase in the federal funds rate to a range of 1 percent to 1.25 percent. The central bank’s move, its fourth raise since 2008, represents its confidence in a strengthening economy and another step toward normalizing interest rates. For consumers, however, the Fed’s decision offers a mixed-bag of potential challenges and opportunities.
In the grand scheme of things, a quarter-point interest rate hike may have little impact on the average consumer who has a good credit score, pays off credit card balances each month, and who either has or is seeking to secure a mortgage or car loan. For some corporate loans, interest rates have even decreased since 2015.
Conversely, consumers will probably notice a slight uptick in the rates they are charged on outstanding credit card balances, or an additional $2.50 a year for every $1,000 of debt they carry on those accounts. In addition, homeowners with adjustable rate mortgages can expect their payments to increase slightly in the short-term and more in the future if the Fed continues to raise rates. As a result, now may be an ideal time for borrowers to consider refinancing their mortgages and home equity lines of credit to take advantage of today’s lower rates.
While financial institutions are raising interest rates on credit card debt, they have been slow to pass those higher rates onto savers who stash their cash in the bank. According to NerdWallet, the average percentage yield (APY) on certificate of deposits (CDs) at traditional banks is currently hovering around 1 percent, which translates to approximately $250 per year on $25,000 in savings.
For bond investors, rising rates can result in falling bond prices and subsequent losses in the value of an existing bond portfolio. To protect against this threat, investors may consider holding onto individual bonds through interest rate changes and fluctuations in bond prices until the date of maturity. At that point, barring any defaults, the investor will receive the face value of the bonds plus all interest payments along the way. Additionally, investors may mitigate their risks by diversifying their portfolios of assets between investments in U.S. stocks, foreign stocks, real estate, bonds and cash. The ideal mix of investments will vary from investor to investor, depending on an individual’s unique circumstances, including his or her savings goals, risk tolerance and time horizon. Financial advisors can be a great source for individual investors to balance these issues and develop a plan that works for them.
The financial planners with Provenance Wealth Advisors work with individual investors, families and businesses to navigate through complex risks in order to help build and preserve wealth for multiple generations.
About the Author: Scott Montgomery, CLU, ChFC, is a director with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
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