Is The Fed’s Interest Rate Hike Good News or Bad?

Retirement, Income, Tax & Estate Planning.

Is The Fed’s Interest Rate Hike Good News or Bad?

December 30, 2015 Uncategorized 0

I know it’s still the holidays and no one wants to get into financial stuff this weekend, but before you know it, it will be Monday the 4th and we will all have to be serious again.

Late last month, the Federal Reserve decided to hike interest rates up a whopping quarter of a percent (.25%). It’s the first time they’ve raised interest rates in almost 10 years (2006 was the last hike) and some are calling it the official end of the financial crisis. We’ll see…’s Ryan Derousseau offered a good analysis of the potential impact of this hike shortly after it was announced (read his take here). According to him, this particular rate increase is unusual, because it’s not being used to fight inflation. There’s very little inflation to fight. Instead, this hike is being used as sort of a buffer; something to eliminate should the market need stimulation in the future. He warns that this rate increase, while Europe and Japan continue to drop their rates, may increase market volatility.

Here’s what that all means for you.
Should this rate increase be the first of several, quick increases – as some analysts believe it is – the market may suffer. Derousseau points to a Goldman Sachs report that shows markets tend to drop by about 10% in the first year of tightening cycles. While energy, industrial, and technology stocks often outperform the market in rising rate cycles, dropping oil prices and lower demands may buck that trend.

Banks are another traditional winner when interest rates rise, but TIAA-CREF data shows that to be more of an old wives tale – with banks outperforming the market only 14% of the time. If anything, Derousseau seems to think this is a time to look for surprises, noting that in 2004, utilities shot up an unexpected 28% in a tighten cycle when they historically went down an average of -5.8% in other tight cycles.

On the bond side, the rule is prices fall when interest rates rise. So again, the value of bonds and bond funds could drop considerably should the Fed begin to aggressively increase rates. Will they? Your guess is as good as mine but again, without much inflation the Fed will be hard pressed to jack up rates.

Back to banks, savings accounts may see a slight boost – provided banks pass the boost of a higher interest rate on to consumers. The rate hike might not be seen on savings accounts, and as for other “interest rate sensitive” areas such as car loans, mortgage rates and annuities, the jury is still out. Time will tell.

As for the crystal ball… still cloudy. What’s in store for 2016? Not sure yet but I promise to let you know by this time next year. Until then enjoy the New Year weekend.

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