Dollars and Sense: Impact of rising interest rates

In the aftermath of the election several trends have been emerging, and higher interest rates are one of them. Since the election, the 10-year treasury has risen approximately one half of one percent, as of Nov. 18.

The significance of the treasury is that mortgage interest rates tend to move in line with changes in the 10-year Treasury yield.  This will definitely have an impact on affordability for those looking to purchase a house.

This recent rise in mortgage rates still needs to be put in context.  From a historical perspective a 4% mortgage rate is still very low, it is just not as low as the 3.5% rate that had been in place before the election.

In addition to the rise in longer term rates there will likely be an increase in short term interest rates.  The Federal Reserve, also known as the Fed, will have its last meeting of the year in mid December, when it will decide whether to increase interest rates.

Prior to the election there was some question about whether the Fed would raise rates at the December meeting.  As of now, the likelihood is extremely high that there will be a quarter point increase in short term rates.

The election had more of an impact on longer term rates, due in part to the likelihood of greater budget deficits with the new administration.  Changes in short term rates are more dependent upon current economic data.

Throughout this year economic data has been mixed.  Recently the economic news has become more favorable.  This is the main reason why short-term rates will likely be raised at the Fed meeting in December.

For the consumer a change in short term rates will impact loans that are directly tied to the prime rate.  An example would be a home equity loan.  Rates on credit card loans could also be impacted.

Auto loans are also impacted by changes in interest rates.  While the Fed raising rates will not impact auto loans directly, it is still likely that rates on auto loans will be going up.

For savers an increase in interest rates will be a positive.  Consumers should note that banks are sometimes slow about increasing rates on certificates of deposit or savings accounts after the Fed raises rates.  Of course a quarter point rise in interest rates is not going to provide much in the way of added interest for a saver.

In most instances when the Fed starts to raise interest rates more increases tend to follow.  What has been unusual about the current environment, was that there was a rate increase late last year, and there hasn’t been any increases since then.  Assuming the economy continues to expand next year, there will likely be additional rate increases in 2017.

The recent rise in interest rates has made the investment case a little more attractive for bonds.  However, would still be cautious in terms of purchasing longer term bonds because further increases in yields would lower the market value of bonds.

We have been in a period of extremely low interest rates for an extended period of time.  Few people would have anticipated that interest rates would have stayed this low for so long.   We have seen some rise in interest rates recently, and most likely rates will continue to move higher.