Federal Reserve Chair Janet Yellen and her team are widely expected to pull the trigger on a small interest rate hike at Wednesday’s meeting.
The latest employment figures revealed a healthy labor market, with better-than-expected job creation during February, which cemented an impending interest rate hike in many analyst’s eyes. Fed officials have been telegraphing their intentions to increase interest rates, and analysts expect that to unfold this Wednesday afternoon.
Continued improvement in the economy, consumer and business confidence, inflation levels and employment all point to a rate increase at the March Fed meeting, says Ron Weiner, managing director and partner of RDM Financial Group at HighTower in Westport, Connecticut.
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At the margin, interest rates will increase slightly. The Federal Reserve is expected to raise its benchmark federal funds rate by 25 basis points to 0.75-1 percent. An increase of that nature would still leave the federal funds rate extremely low by historical standards. For example, prior to the Great Recession, the federal funds rate stood at 5.25 percent in June 2006.
What could this mean for investors and consumers? Experts generally don’t expect a small rate hike to significantly impact your pocketbook or portfolio, at least not at this point in the interest rate cycle.
“I think it will have very little impact on investors,” says Joe Heider, president and founder of Cirrus Wealth Management in Cleveland. “I believe both the equity and fixed income markets have factored in a rate hike in March. As long as its 25 basis points, it will have minimal impact on the market.”
The stock market isn’t expected to stumble on this rate increase as the Federal Reserve is hiking interest rates in an attempt to normalize monetary policy because the economy is improving, analysts say.
“The Fed wants the economy to do well, and a rate hike should be interpreted as a vote of confidence for the economy,” says Jonathan Bernstein, senior research analyst at Hefren-Tillotson in Pittsburgh.
Heider doesn’t expect a 25-basis-point rate hike to trigger a correction in the stock market. “The market has already assumed there will be a rate hike, and a rate hike is indicative of continuing strengthening of our economy and ultimately bodes well for the future,” Heider says.
However, the stock market is notorious for not liking surprises. While traders have largely priced in a small interest rate hike, there is a scenario which could potentially send a mini-shockwave through the equity arena.
“What would cause investors and other market participants pause or concern would be an unexpected 50-basis-point hike. That would suggest concerns about higher-than-expected inflation and thus altering the stated interest rate glide path,” says Jason R. Staley, investment relationship manager at Schneider Downs Wealth Management Advisors in Pittsburgh.
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Markets are forward-thinking, and the Treasury bond market has also been pricing in expectations for an interest rate increase.
“The bond market has begun to price in the increased possibility of an interest rate hike taking place at the March meeting,” Staley says. “The 10-year yield on the U.S. Treasury bond has been steadily rising from a low of about 2.3 percent in mid-February to 2.5 percent.”
Borrowers could see a slight impact in the wake of a Federal Reserve interest rate hike this week. Consumer loans, including home equity lines of credit and credit card loans, are typically based off the prime rate.
The prime rate is set by commercial banks and is typically set 300 basis points or 3 percent above the overnight federal funds rate, Weiner says. The prime rate is currently set at 3.75 percent in the U.S. and could edge higher if the Fed hikes rates this week.
A WalletHub study found that credit card companies hiked their average APR for new offers by 18 basis points ahead of the December 2015 interest rate hike and another 13 basis points afterward, which will “cost consumers roughly $1.4 billion in additional credit card finance charges.”
For those carrying high-interest credit card debt, it is worth taking the time to develop a strategy to pay down that debt as additional Fed rate hikes are expected throughout 2017, which could further increase credit card interest rates.
One approach is called the “snowball method” where consumers devote the majority of their monthly debt payment to the credit card balance with the highest interest rate, while making minimum payments on other accounts. The goal is to pay off the most expensive debt first.
Mortgage rates could increase slightly. These rates are generally related to the 10-year Treasury note yield.
“Rate hikes tend to push up many interest rates, including mortgage rates. But not all of the time,” Bernstein says. “Other factors, such as the strength of the general economy and the direction of the stock market, can have just as large an effect on mortgage rates, so there’s no guarantee of an increase in mortgage rates.”
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For savers, the move is in the right direction, but don’t expect a big jump in interest earned on bank certificates of deposit or savings account rates. “Even if a rate hike were to increase money market and CD rates by the full 25 basis, the impact is positive but minimal,” Heider says.
A key takeaway from this week’s Fed meeting may not be what the central bank does, but what it says it will do next.
“Just as significant as the announcement of a rate hike is the messaging that comes along with a rate hike,” Bernstein says. “If the Fed signals that it is going to become more aggressive raising rates this year, that could move markets and interest rates as much as an actual rate hike. Expectations are a key part of the effect of rate hikes.”
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A Rate Hike Won’t Matter Much to You originally appeared on usnews.com
