In late September, the Federal Reserve raised its key short-term interest rate to 2.25 percent from 2.0 percent, in its third increase of the year.1
The good news is that higher rates offer the potential for higher returns on CDs, bank savings and other fixed-rated accounts that have been languishing for years. The bad news is that higher rates are meant to damper consumerism.
As a result, interest rates likely will increase for credit card balances, auto loans, adjustable-rate mortgages and home equity loans. When it becomes more expensive to borrow money, people tend to spend less. This is by design. When the Fed raises rates, it is intended to slow down the momentum of economic growth so that inflation doesn’t rear its ugly head and send prices soaring.
Americans have had it good for a number of years. In addition to low interest rates, we’ve enjoyed a long period of low gas prices and a long-term bullish stock market. Even with the recent increase in interest rates, they are still considered low by historical standards.2
The Fed makes decisions about monetary policy based on strengths or weaknesses in the overall economy. Members of its board are not concerned with investors’ personal circumstances. That’s where we can help. It is important to weigh economic factors such as the change in interest rates within the context of your personal financial situation. For younger investors with a higher allocation to stocks, slowing growth may impact portfolio returns. However, it’s important to remember that lower returns are not the same as negative returns. Sometimes we just may need to adjust our expectations, not our investments.
For investors near or in retirement, higher interest rates may be a welcome change. With more assets allocated to fixed-interest financial products, an increase in rates may yield higher income in the future.
One of the interesting aspects of studying the investment markets is that not all economic and market analysts agree on what will happen next. The following is a sampling of how some U.S. analysts see the markets moving forward.
Mike Wilson, an analyst at Morgan Stanley, noted that the most recent hike in interest rates was followed by high volatility in the stock market. He says we’ve reached a “tipping point” in stock valuations and projects that the value sector is poised to outperform the growth sector moving forward.3
Goldman Sachs favors additional tightening in monetary policy to help slow down the potential for inflation. The wealth manager says it believes the economy could require five more interest rate hikes by the end of next year.4
Analysts at Blackrock see continued economic growth in the United States well into 2019, despite looming potential trade wars and political uncertainty.5 They say the rise in interest rates will make the municipal market more appealing to investors seeking higher yield. They favor medium-term bonds in the 10- to 15-year range.6
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