News and Commentary

What does the Federal Interest Rate Hike Mean to your Wallet? By Scott Montgomery, CLU, ChFC

In July 2022, the Federal Reserve Bank enacted its fourth interest rate hike for the year and its second consecutive 0.75 percentage point increase in an attempt to rein in record-high inflation without triggering a prolonged recession. While additional rate increases are expected in the Fall, the benchmark federal funds rate, which began the year near zero, is currently 2.5 percent, impacting consumers’ wallets and providing a mixed bag of potential challenges and opportunities.

Higher Costs of Borrowing

A rise in the federal funds rate has a ripple effect across all interest rate indices and the amount consumers ultimately pay on loans for new cars, home mortgages and credit card balances. For example, if you carry a balance of your credit card, the annual percentage rate (APR) you are currently paying on that amount has increased more than 16 percent since the start of the year. Consequently, now may be an ideal time to pay off your outstanding balance, if possible, or pay down your current balance down to avoid unnecessary interest charges. You may also consider consolidating all your credit card debt into one card with a lower rate locked in for a set period of time.

Interest changed on auto loans is tied to the prime rate, which is generally 3 percentage points higher than the federal funds rate. Since the start of the year, the short-term rate on car loans is up one percentage point, which, in the grand scheme of things, has little impact on the average consumer with a good credit score. Borrowers with poor credit history, however, will pay a premium on top of generally higher car prices that increased during the pandemic.

The U.S.’s hot housing market, marked by low inventory and rapid price increases, has also been affected by rising inflation and interest rates. According to Freddie Max, the average 30-year fixed rate mortgage, which was 3.22 percent at the start of year, jumped to 5.4 percent as of July 28, 2022. These higher mortgage rates coupled with higher housing costs have not only made it more difficult for first time buyers to enter the market, but it has also made it more expensive for existing borrowers to tap into the equity of their current homes.

Potentially Higher Yields on Savings

With inflation hovering around 9 percent, consumers are facing higher costs of living and are incentivized to cut back on spending and save more of their earnings. While banks and other financial institutions increase the interest rates they charge on loans and credit card balances in a rising federal funds rate environment, they theoretically also increase the rates of interest they pay on savings accounts and certificates of deposit (CDs.) Unfortunately, most brick-and-mortar banks 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 a one-year CD at a traditional bank is currently below 1 percent while online banks are offering top rate of as much as 2.75 percent. It pays to shop around before parking your hard-earned savings into any financial institution.

Diversified Investment Portfolios

For the first half of the year, many investments declined in price for a multitude of reasons beyond the Federal Reserve’s rate hikes. Over the longer-term, however, a diversified investment portfolio that includes U.S. and foreign stocks in good quality companies, real estate, bonds and cash will always provide patient investors a strong hedge against rising interest rates and inflationary risk. 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.

For bonds, it is a general rule that rising interest rates lead to falling bond prices and subsequent losses in the value of an existing bond portfolio. To protect against this threat, you may consider simply holding onto your bonds until the date of maturity. At that point, barring any defaults, you will likely receive the face value of the bonds plus all interest payments accrued along the way. However, if you are in the market to buy bonds, now may be an ideal time to do so with prices for short-term bonds and municipal bonds declining.

The financial advisors 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 is a director with Provenance Wealth Advisors, an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provweath.com.

Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.

Scott Montgomery is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.

Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/deal and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.

The information contained in this report does not claim to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investments mentioned may not be suitable for all investors.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk, and you may incur a profit or loss regardless of strategy selected.

To learn more about Provenance Wealth Advisors financial planning services click here or contact us at info@provwealth.com

Posted on August 9, 2022