The Federal Reserve raised interest rates for the first
time in nearly a decade. In a move precipitated by an improving and decent
economic growth, the Federal Open Markets Committee decided to raise short-term
rates by a quarter of a percentage point from basically zero. That’s where the
bellwether Federal Funds rate, which is what banks charge one another on
overnight loans, has stood for seven years. The last time the Fed increased
borrowing costs was before the start of the global financial crisis in 2006, at
the start of George W. Bush’s second term.
Today’s move follows months of speculation about when the
central bank would act, especially following the Fed’s decision in
September to leave rates untouched amid concerns over the strength of the
global economy. Here at home, though, the nation’s employment picture has
markedly improved over the past three months, with monthly job gains
averaging 218,000. And the so-called core CPI inflation rate, which
strips out volatile food and energy prices, hit the Fed’s 2% target in
November.
While the Fed feels the pressure to raise rates to
historically normal levels, it doesn’t have to do so at an accelerated pace.
Even though market watchers have been saying for at least half a decade that
rates can’t stay this low for this long, today’s move likely won’t augur
pre-recession levels. But as with any economic development, there are winners
and losers.
IF YOU’RE A BOND FUND
INVESTOR…
Rising interest rates are a risk for any investor who owns
shares of a bond mutual fund or ETF. The reason: Bond prices fall when market
rates rise.
To find out how much your bond fund is likely to drop in
price, you can look up the fund’s “duration”. This figure reflects how
sensitive a bond fund is to interest rate fluctuations. So Vanguard Total
Bond Fund, with an average duration of 5.7, would fall about 5.7% with a 1%
increase.
But as Chris Cook, president of Beacon Capital Management,
told MONEY’s Carla Fried, bond fund owners aren’t in for that big a scare in
this type of rate environment. Also keep in mind that the Fed only set the
yields on short-term borrowing costs, not on long-term yields. One scenario is
that “the Fed raises short rates, yet there’s no sign of inflation,” which
affects long rates, says Mark Luschini, strategist for Janney Montgomery Scott.
If that happens, demand for longer-term bonds could rise, actually pushing
long-term prices higher despite the rate hike.
Finally, remember that you don’t invest in bonds simply for
high returns, notes Gregg Fisher, chief investment officer of Gerstein
Fisher, but rather as a ballast in volatile times. When stocks fell more than
50% during the great recession, short-term Treasuries increased by 9%.
IF YOU’RE A SAVER…
Savers have endured a miserable time ever since the Great
Recession. In MONEY’s Best Banks package, we found that the average
brick-and-mortar savings account yields only 0.08% interest on a $10,000
balance — or $8 bucks a year. So higher borrowing costs should provide a salve.
Unfortunately banks take eight months, on average, to
increase interest on a money market account following a Federal Reserve hike
and 14 months for interest checking, per a 2013 Fed study. Nevertheless, expect
your CDs and savings accounts to do add more to your wealth over the next
couple of years.
IF YOU’RE A BORROWER…
Those who plan to borrow money, say for a home or auto loan,
theoretically should be less happy about the move. Higher interest rates means
the cost of financing a loan will increase. The average 30-year fixed rate loan
comes with a 3.9% in November, per Freddie Mac, compared to 6.2% in six
years earlier. Despite all of the Sturm Und Drang about today’s announcement,
the amount you pay for most of your loans shouldn’t really change.
Those who carry a balance on their credit cards, however,
might feel a bit more pain, although not much more. NerdWallet estimates that
the average indebted household, which carries more than $15,000 in debt,
will have to pay $125 more in interest payments over the next five years.
Click
here to access the full article on Time Money.