Mellody: I believe so. The Fed has said it expects to continue to move toward raising rates because it believes economic growth in the U.S. will continue, which will further push the unemployment rate down, drive slow but steady wage growth and eventually raise inflation to target levels. In a speech last week after the Fed decision, chairwoman Yellen reaffirmed these beliefs. Some analysts expect that could happen as soon as October, but most feel confident that it will happen before the end of 2015.
Tom: What will that mean for consumers?
Mellody: There are so many places people will feel a rate hike! First: your investment portfolio. In a period of rising interest rates, if you have significant investments in bonds, you will likely take a hit, because interest rate hikes will eat away at those returns. However, if rates are rising for the right reasons, the impacts to your portfolio may not be negative. This could very well be the case right now, as we are a growing economy, and an improving labor market with job creation. In this environment, high yield bonds and floating rate bonds can do well. The same is true for stocks. Stocks don’t have to decline in a higher-rate environment as long as the rate hikes are coming due to stronger economic numbers. A number of times we have seen the stock market rise along with rates if the economic fundamentals are improving or strong.
However, borrowing money will get more expensive. If you are thinking about buying a house, an interest rate hike will make it more expensive to borrow that money. For example, if you borrowed $165,000 over 30 years at 3.25%, you would pay just over $92,000 in interest over the life of that loan. If you borrowed the same amount at 4%, you would pay nearly $118,000. That is $28,000 that could have been saved and invested, which is significant. The same is true for other borrowing, such as auto loans or student loans. Overall, an interest rate rise signals a stronger economy, but there will be some drawbacks for consumers.
Tom: Always good to have you explain things to us! Thanks for joining us, Mellody!
Mellody: Great to be here, Tom!
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News.
Money Mondays: What The Fed Interest Rates Mean For Your Money was originally published on blackamericaweb.com