What the Fed’s Rate Increase Means to You
So the Fed’s policy-making committee announced a 75-basis point rate increase on June 15th, the largest one-time hike since 1994.
The move was not much of a surprise, given the current rates of inflation. The big question you may be asking is this: “what impact will this have on me?”
Here’s what the Fed move could mean for you.
What will higher rates cost you personally?
An interest rate increase of .75% means that for every $10,000 in debt you have, you’ll pay an extra $75 in interest. Of course, it’s important to remember that the Fed’s benchmark rate change does not necessarily mean that the rates you’re being charged on loans you have currently will also change immediately by that amount. Every loan is different. It’s likely, though, that any bank loans you have with a variable rate will go higher.
How will the rate change impact the stock market?
The broad stock market has taken a beating so far this year, with various factors coming together at once to create a kind of “perfect storm” of trouble. While the prospect of the Fed’s tighter monetary policy was maybe the biggest factor in the stock market’s performance this year, oddly enough, this large increase might actually help stocks in the near term, as this move represents a powerful signal from the Fed that they’re attempting to recapture control of inflation.
Of course, it’s impossible to say what will happen to stocks over the next 12 to 18 months, but if you’re properly Bucketized, the next couple of years of stock returns shouldn’t have any significant impact on your current situation.
What about savings accounts, CDs, and other short-term assets?
Ah, yes, Bucket #1. With higher interest rates, the bright side for us consumers is better yields from savings accounts and certificates of deposit.
Back in May, the typical online savings account yield increased from 0.54% to 0.73%, while average yields on one-year online CDs rose from 1.70% to 2.53%.
That’s much better than the near-zero interest rates we’ve been looking at over the past several years, although it’s still far below the rate of inflation. Of course, Bucket 1 is there to provide you with a steady, reliable cash flow, and not fantastic rates of return. But any increase in rates of return is always a welcome sight.
Will credit cards and home equity lines of credit be affected?
They will indeed. Credit card debt will become more expensive, with higher APRs hitting borrowers probably within one or two billing cycles after the Fed’s increase.
Credit with adjustable rates should also see an impact. This includes HELOCs and adjustable-rate mortgages, which are normally based on the prime rate. And speaking of which:
What’s the impact on mortgage rates?
Mortgage rates this year have already surged in response to the Fed’s earlier rate increases. According to Freddie Mac, one year ago the average 30-year mortgage stood at 2.96%, but on June 9th of this year, the average rate was 5.23%.
So naturally, the annual cost of buying a property has gone up already. But this rate hike doesn’t necessarily mean that mortgage rates will shoot up significantly again. Since many rate hikes are done in anticipation of future market conditions, this 75-basis point hike may already be baked into current rates. It’s still too early to tell for sure.
The bottom line here is that uncontrollable economic and market conditions are all around us. The best thing you can do to help yourself in any situation is to be prepared, and to have a strategy that anticipates all of this. It’s why we Bucketize, and why we’re not bothered by huge stock market and interest rate swings.
If you need some help putting a strategy together, or if you want to review your current situation to make sure you’re still on track to reach your goals, we do this every single day at Lucia Capital Group. How can we help you the most? Let’s talk.
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal. Accordingly, no client or prospective client should assume that the information presented serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
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Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.