By Robert R. Johnson, President and CEO, The American College of Financial Services, and author of INVEST WITH THE FED: Maximizing Portfolio Performance by Following Federal Reserve Policy.
The Federal Reserve Open Market Committee is meeting the week of Dec. 12, 2016, and it is widely anticipated that they will raise the target fed funds rate by 0.25%. Consumers may not be concerned with this move, as they do not borrow money from the Federal Reserve. However, they should care.
The target fed funds rate influences interest rates throughout the economy – automobile loan rates, mortgage rates, credit card rates, and rates on savings accounts and CDs. Simply put, we are likely to see rates rise throughout the economy in both the near term. In fact, I believe that the Fed will hike rates three or four times in calendar 2017. That would mean that the benchmark Fed funds rate will be 0.75% to 1% higher than where it is today.
While interest rates throughout the economy are not directly tied to the fed funds rate, rates are greatly influenced by the widely quoted rate. What will see in the coming months is rates rising throughout the economy. If you are contemplating a big-ticket purchase that is going to be financed with debt, there is no time like the present to obtain financing. The bias in the marketplace is certainly for rising, rather than falling rates.
Additionally, rising rates are generally bad news for stock investors. In Invest With the Fed, Gerald Jensen of Creighton University and Luis Garcia-Feijoo of Florida Atlantic University and I found that from 1966 through 2013, the S&P 500 returned 15.2% when the Fed was lowering rates and only 5.9% when the Fed was hiking rates.
Rising rates are not all bad. If you are a net saver, you benefit from rising rates. If you are a net borrower, rising rates are bad news.