Atlanta Financial Newsroom
Interest Rate Hikes: What Movement Really Means
December 11, 2018
No matter where you turn these days, news broadcasters, financial pundits and market watchers are talking about the Federal Reserve and what they will do with interest rates. Will they continue to increase rates or become more accommodative and slow down their increases? Since the 2008 financial crisis, the Fed has raised rates eight times (once in 2015, once in 2016, three times in 2017 and, so far, three times in 2018). What will happen next?
Conventional wisdom is that the Fed will raise rates once again this year at their December meeting (to 2.5%) and likely three more times in 2019. However, recent market volatility and some mixed economic signals have brought this thinking into question. The U.S. continues to have strong GDP growth and low unemployment but there are signs of weakening consumer confidence and inflation on the horizon. Given this backdrop, there are now some questions about how far the Fed is willing to push interest rates. On Wednesday, November 28, Fed Chairman Jay Powell said he felt rates were “close to neutral,” meaning that additional rate hikes could be less than expected. And, on that news, the financial markets soared with the Dow Jones up more than 600 points that same day. It is clear that the Fed has a very difficult balancing act – keeping the economy from over-heating and avoiding financial bubbles that can occur when rates are too low for too long, while, at the same time, avoiding raising rates too fast and choking off still positive economic growth.
The higher the Fed pushes interest rates, the more consumers and businesses pay for the money they borrow. Mortgage and loan rates, as well as credit card interest charges, respond to the Fed’s action quickly – sometimes the same day. That’s because as the Fed increases its interest rate, the prime rate – the amount offered banks’ most credit-worthy customers – mimics the Fed’s action. A higher prime rate pushes up the fixed and variable rates the banks charge their customers. Often, the financial markets take a downturn on just the inference that a rate hike could be coming.
In September, the Fed raised the rate for the third time this year, putting the Fed funds rate at the highest level since April 2008. However, the Fed surprised most of us last month when it opted to not raise rates at that juncture. Because the Fed chose not to hike rates in November, financial pundits are looking at the Fed’s December meeting as another likely opportunity for a rate increase. These same market watchers are predicting the Fed will raise rates at least twice in 2019 and more likely three times.
Hot Economy Usually Triggers Rate Increase
What many investors fail to recognize in the current financial environment is the silver lining that comes with rate hikes. The Fed ups the interest rates to avoid an over-heated economy. The objective is an economy where financial and labor markets are performing well, and there is robust spending on the part of businesses and consumers. When the pundits expect these positive trends to continue and start to worry about inflation, look for the conversation predicting a Fed rate hike to pick up.
Often, a drop-in bond values follows a rate hike, but the initial downturn usually doesn’t last. Besides, the type of investor drawn to bonds, either as a way to generate income or conserve capital over the long term, should not be repelled by a short-term dip.
Moreover, the real reasons why rate hikes generate so much attention is not the rate increase itself but the market’s and investors’ reaction to it. Financial markets do not respond well to change of any kind, which makes a rate increase unattractive not on its own merit but because of the uncertainty surrounding it. And remember, a rate hike doesn’t always mean stocks will be depressed. In 2013, interest rates went up and the financial markets grew as well.
A diversified portfolio can navigate through just about any financial uncertainty, including potential rate hikes. In the majority of cases, diversification offers an opportunity for long term growth across a wide variety of economic cycles. If you would like to know more about how the Fed’s rate increases and its recent actions could be influencing your portfolio, contact your wealth manager today.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws. What do you need to pay attention to?
Recently, my husband and I took care of our 12-month old granddaughter while our daughter and son-in-law took a much-needed vacation together. When they dropped her off, their parting words were, “She is almost ready to walk, but make sure she waits until we get home!”
Famous last words… Of course, as soon as they left the house, she was trying to walk – literally everywhere. And after about 24 hours she was taking her first baby steps. By the time they arrived back three days later, she was walking (a little unsteadily but walking none-the-less) and was very proud of herself. Great strides in just a few days but predicated on all of the trial and error and lessons learned in the months before.
Financial planning is a little like this. You’ll make mistakes along the way – everyone does. But you will do a lot of things right as well and the important thing to remember is that your financial health is based on doing the little things right, all along the way.
So, what should you be doing when you are 22, 52 or 72? Here are three important tips for each decade.
Cathy Miller Receives the Women’s Choice Award® as Highly Recommended Financial Advisor by Women for Women for Seventh Consecutive Year
Atlanta – November 19, 2019 – Atlanta Financial Associates, an independent financial advisory firm, recently announced that Cathy Miller, MBA, CFP® , CRPS®, CDFA™, has received the Women’s Choice Award® for Financial Advisors and Firms.
As the leading advocate for female consumers, WomenCertified Inc. selected Miller based on rigorous research and specific objective criteria; she has received this recognition every year since 2013.