What the Fed Rate Hike Means for Investors

December 19, 2016

In a nutshell, don't lose sleep over it. The hike and future hikes are a sign that the Fed, which keeps a close eye on economic indicators, believes that the economy is in good health.

Last week, the Federal Reserve Board announced that it would raise interest rates just in time for the New Year and a new administration. Of greater interest was that the Fed hinted at the possibility of future rate hikes. Upon hearing news like this, many investors ask the simple question: What does this mean for me? So let’s tackle that one, as well as two other quick questions you might be wondering about, quick-hit style.

First, though, if you’re feeling some anxiety about this … don’t. The hike and future hikes are a sign that the Fed, which keeps a close eye on economic indicators, believes that the economy is in good health.

1. What is the immediate impact on me as an investor?

In the short-term, not much will change. The answer to this depends, of course, on your investing window, the amounts and types of investments you have, and the overall effect on the market. But a shorter, simpler answer is: not much, particularly immediately.

When a rate increase is expected, the effect on the overall market is usually baked into stock prices already, at least partially. It’s reasonable to expect at least a bit of short-term stock market anxiety, so you may see a little higher market volatility. Don’t make significant changes to your portfolio based on it. Why? Consider what would have happened if you had panic-sold stock the day after the 2016 election. The intervening days saw a swift and dramatic market recovery. The interest rate hike shouldn’t have that same effect, but the strategy should be the same: Stick to your long-term investing goals.

2. What will be the impact for saving and credit rates?

Interest rates on savings accounts are unlikely to increase much in the short-term, although they may creep up a bit from their current lows. A Fed rate increase is only one of many factors banks consider when determining their savings interest rates, and it isn’t the most significant among them.

A bigger and more immediate impact is likely for your credit card interest rates, which typically rise and fall with the prime rate. The prime rate is, in fact, directly affected by the Fed’s move earlier this week. The good news is that the major credit providers have a lot of competition, and they know it. Dentists could easily shop around for a better rate. Just be sure you know what rate you’re paying and that you’re on alert for any increases. Yes, credit issuers generally have to inform you about rate increases, but there are some fuzzy exceptions for increases triggered by a hike in the prime rate. Review your credit card statements carefully for any sign of an increase.

3. What is the likely impact to my mortgage?

You may have noticed that 30-year fixed mortgage rates have been creeping up since the election, and this is likely to continue. This is likely to slow refinance rates and inch up your mortgage payment, depending on how much you owe

The bottom line: This is generally good news. Keep a close eye on the rate increase’s impact, but for most, immediate changes to your strategy are unwarranted.