Your “Cheat Sheet” For Rising Rates

mikelarson-150The Federal Reserve chose not to raise rates at its meeting last week. But officials have made clear they are on the cusp of hiking soon — for the first time since June 29, 2006.

That move was more than nine years ago, and that’s an eternity in the financial markets. Heck, junior analysts and interns starting their first jobs on Wall Street this summer were in middle school the last time the Federal Reserve raised rates. So you can see how this event could rock markets to their very core.

But it’s not just markets that are vulnerable. Short-term rate hikes impact everything from how much you pay to borrow money to buy a car to how much interest you earn on your money market accounts. So now is a great time to get wise to how markets, loans, deposit products, and more are likely to react whenever the Fed does make its move.

First, expect more volatility in stocks and bonds. The Fed’s stable rate policy has helped to suppress volatility across all asset classes. That’s ending.

Since we get a Fed meeting every six weeks or so, and investors will have to approach every meeting unsure of its outcome, that means you’re going to see more frequent bouts of manic-depressive behavior.

Second, expect rates on variable rate loans to rise with each federal funds rate hike. Variable-rate credit cards and home equity lines of credit (HELOCs) are often priced off the prime rate, which moves in lock step with the funds rate.

Editor’s Note:  Five mainstream myths about interest rates

So you may want to consider transferring any balances to a fixed-rate credit card. Or if you have a HELOC with a large balance on it, check to see if your bank offers a fixed-rate option. Many institutions allow you to fix the rate and payment on a portion of your balance, often at the cost of only a small fee. That move could protect you from a substantially higher interest bill if we end up getting a series of Fed rate hikes.

Third, yields will start rising on variable-rate savings products like money market accounts (MMAs). They’ve been paying squat for years, so that will be a welcome change.

But don’t expect to get rich from highly liquid accounts unless rates skyrocket. The average money market account yields only 0.1% or so, according to  So even a pair of 25-basis-point hikes by the Fed at the next few meetings would only push that rate toward 0.6% or so.

Fourth, don’t lock in today’s low yields on long-term savings products like 3-, 4-, or 5-year CDs. Instead, wait until we’ve gotten a handful of rate hikes so your bank has to offer you better yields. Consider online-only banks, which tend to pay higher yields because they don’t have physical infrastructure costs to cover by offering lower returns to deposit holders.

Fifth, when it comes to home mortgages, the impact of fed hikes is more nuanced. Rates on loans like 1-year Adjustable Rate Mortgages (ARMs) are much more likely to be directly influenced by changes in the funds rate than rates on 30-year, fixed-rate mortgages (FRMs). That’s because ARM rates generally follow shorter-term rates that are guided by the federal funds rate, while rates on long-term FRMs are guided by yields on long-term Treasury and mortgage bonds.

So don’t expect a 25-point Fed hike to automatically drive 30-year loan rates up by 25 points overnight. It all depends on how hyperactive bond traders react to what the Fed does.

This quick “cheat sheet” should give you a leg up on many investors, borrowers, and savers. It will help prepare you for what the Fed is about to dish out, and take advantage of the resulting volatility.

Until next time,