It’s possibly the least surprising piece of financial news this quarter. And that’s by design.
In the last week of September the Federal Open Market Committee (FOMC), the monetary policymaking body of the Federal Reserve System, announced that they would be raising their target rate to between 2.00% and 2.25%. This is 0.25% above their previous goal set in June.
The target rate is the interest charged by one depository institution on an overnight sale of balances at the Federal Reserve to another depository institution. In other words, it’s what banks can charge each other for short-term loans.
This basic “cost of money” for financial institutions is the basis by which nearly all loan rates are set, including government bills, notes and bonds. So the FOMC is extremely careful that a change in the target rate does not come as a surprise. And the official change seemed to go as planned with the fixed income markets having a minimal immediate response to the new rate.
What A Higher Target Interest Rate Means
As you might expect, one result will be that financing for businesses and individuals is going to get slightly more expensive than it was prior to the most recent increase.
According to USA Today, “The Fed’s rate hike is expected to ripple through the economy, lifting borrowing costs for variable-rate consumer loans such as credit cards, home equity lines of credit, autos and adjustable-rate mortgages.”
A positive result will be a modest rise in the interest banks pay on savings accounts and CDs. For consumers, this should be further incentive to pay off personal debt and get more aggressive about saving.
For investors, the rate hike is expected to raise bond yields. Marketwatch reports that this increase in the target rate with the clear expectation of more to come in the future has already caused a modest rise in the 10-year Treasury note.
But what investors and financial experts have been looking at even more closely than the 0.25% adjustment is the Fed Chairman’s accompanying remarks. Jerome Powell, who succeeded Janet Yellen as FOMC Chair, said, “Our economy is strong, growth is running at a healthy clip, unemployment is low. This is a good moment for the U.S. economy.”
After the recession of 2008 the Fed used extremely low interest rates to stimulate the economy back to positive territory. Those extraordinarily low interest rates remained well below the historical average for several years. Now with healthy, sustained growth and low inflation, the committee will continue to raise rates until they reach a level where they are considered neither a stimulus nor a dampener.
In its official statement, the Fed says that it plans “further gradual increases” in its benchmark rate, and it maintained its forecast for another rate hike in 2018 and as many as perhaps three more in 2019. If they’re right, this means continued good news for investors who rely on healthy economies to drive the engine of inflation-beating returns over the long term.
Of course optimism even by the FOMC is no guarantee of future growth. So while you’re positioned and hopeful to take advantage of continued market expansion, also be ready to withstand the inevitable volatility that can occur at any time. We can help you understand how interest rate changes can impact your investment portfolio.