Interest
Rates
On The
Rise
T
he Federal Reserve increased the
short-term Fed Funds interest
rate range to 0.25%-0.5% at their
December, 2015 Federal Open Market
Committee (FOMC) rate setting meeting.
This is the fi rst rate hike since 2006 and, while
it is a vote of confi dence in the economy it
leaves investors wondering how fast rates will
go up and how high they will go. dependent. Theoretically, they could move
faster or slower depending on how the jobs
market, the U.S. economy and the infl ation
outlook perform.
So, why raise rates now? Given that pace, Fed offi cials don’t anticipate
the Fed Funds rate going above 3% until
2018 (based on the average of estimates).
Additionally, the Fed feels that the 3% to 4%
range they hope to reach in 2018 may be the
logical place to stop hiking rates since this
range is consistent with the long-run estimates
of where they think the Fed Funds rate
should be.
Though improved, the U.S. economy isn’t
fi ring on all cylinders and infl ation isn’t out of
control, so it seems like a strange time to start
increasing interest rates. However, the Fed is
concerned that infl ation may increase soon
given the low level of unemployment. They
don’t want to slow our current economic
expansion, but they do want to reset some of
their monetary policy tools and avoid having
infl ation become a major concern.
How fast will interest rates rise?
By Daniel T. Newquist,
CFP®, AIF®
Dan Newquist, CFP®, AIF®,
Principal & Senior Wealth
Advisor with RNP Advisory
Services, Inc., a registered
investment advisor, Morgan
Hill. He can be reached at
408-779-0699 or dnewquist@
RNPadvisory.com. Securities
offered through Foothill
Securities, Inc., member
FINRA/SIPC, an unaffiliated
company.
The Fed indicated that they will take a
gradual approach to increasing interest rates.
The economy isn’t overheating and infl ation
isn’t out of control, so the Fed will fi rst
attempt to move interest rates to be less stim-
ulative. This should help the Fed reset their
interest rate policy tool and allow them to
better react to future recessions or geopolitical
risks that may shock the economy or markets.
Based on their December estimates, the Fed
is forecasting approximately four additional
interest rate hikes in 2016. This would move
the Fed Funds rate from the current range
of 0.25%-0.5% to 1.25%-1.5% by the end
of 2016. This a pace that is much slower
than previous rate hike cycles. The Fed also
stressed that future rate hikes will be data
How high will short-term rates go?
According to the FOMC’s December press
release, they are predicting a rate increase of
around 1% per year for the next three years.
How does this impact you?
Rising interest rates makes it more expensive
for businesses and consumers to borrow money
on everything from lines of credit to auto loans
to mortgages.
Investors may also feel the effects of rising rates.
Retirees, and others who seek income from
bank accounts, CDs, Bonds and other fi xed-rate
investments could benefi t from higher yields.
For U.S. stocks, there are many economic
bright spots that could help push returns
higher, but companies who rely heavily on
borrowing could face higher costs which could
impact their bottom lines and stock price.
Your fi nancial advisor can help you under-
stand the impact of rising interest rates on
your investment and retirement accounts and
address any questions or concerns you
may have.
This article is intended for educational purposes only. It is not intended as investment
advice. Always consult your fi nancial or tax-planning professional for guidance
with respect to your specifi c situation.
74
GILROY • MORGAN HILL • SAN MARTIN
MARCH/APRIL 2016
gmhtoday.com