Will they or won’t they? We’ve been hearing that the Federal Reserve is going to increase rates for nearly a year now, which reminds me of a story read to me as a child.
“The Fed! The Fed! The Fed is raising the rate!”
All the economists came running to their laptops, smart phones and twitter accounts. But when they arrived, they found no increase. The boy laughed at the sight of their angry faces.
“Don’t cry increase, when there is no increase,” said the economists. They went grumbling back to their rich opinions on price increases, stock market analysis, unemployment rates, national deficits, and what pants the president should wear tomorrow.
Later, the boy sang out again, “The Fed! The Fed! The Fed is raising the rate!” But no increase yet again!
Does this remind you of the story The Boy Who Cried Wolf? The Federal Reserve has kept interest rates near zero for more than six years. There are a lot of potential pros and cons to expect once Chair Janet Yellen presses that “imaginary” increase rates button.
Below is what I believe we can expect when the Federal Reserve does finally increase rates:
Mortgages and Housing
Mortgage rates WILL rise. In my opinion, this will be the most significant wave we will see due to the increase. Fixed mortgage rates often follow and move not only based on mortgage backed securities in the market, but also according to what the Federal Reserve is going to do. If your customers are contemplating purchasing a home soon, help them make that dream a reality. Not only will mortgage rates increase, but the price of homes is increasing as well! Help your customers strike while the iron is hot!
According to Keller Williams Realty
The median home price reported by the National Association of Realtors increased 5.1% in March to $212,100. Prices are 7.8% higher than the same month of the previous year. The magnitude of price increases continues to expand despite growth in the number of listings on the market due to sales growth outpacing inventory.
Loans
Fixed rate equity loans, variable rate credit cards, car loans and personal loans will mirror mortgages. Many consumers will be looking to pay off revolving credit as soon as possible. If your customers are concerned about this type of credit debt, suggest a fixed rate personal loan that will allow them to pay the debt off in a set number of payments.
Additionally, do you have customers that are in the market to trade in their car or are near the end of their lease? Now may be a good time to help them pull the trigger. Dealerships are more willing to negotiate as leased vehicles near the end of their terms. Lock in auto loans with customers.
According to Bankrate.com
The average 48-month used car loan declined 1 basis point to 5.37 percent, while the average 36-month used car loan held at 5.2 percent.
Stock Market
Volatility in the stock market is inevitable with a rate increase. Investors should be on the defense, rather than looking for ways to come out on top. Many investment advisors suggest that financial institutions and insurers benefit during rising-rate periods. Financial institutions can charge more for lending, thus increasing their spread between what they pay depositors and what they charge for loans. Insurers can earn higher returns on premiums.
Others suggest that Real Estate Investment Trusts (REITS) and utilities can have significant returns during a rising-rate environment. However, some also suggest that these two are already overvalued. Be careful and do your due diligence if you want to risk your hard earned cash in these investments. As always, consult your financial advisor for any investment related advice. Bankers, steer your customers toward internal advisors.
Bonds
Be mindful of Bond holdings during these rate increases.
Investments 101: Bonds have an inverse relationship with interest rates; the market value of a bond will fluctuate as interest rates rise and fall. As interest rates are poised to rise, the market value of your bond will fall.
Bond funds are of greater risk during periods of rising-rate environments. Bond funds pay returns based on the Net Asset Value of the fund. As other investors liquidate their shares to minimize loss or change their investment strategy, a fund manager can be forced to sell bonds within the fund before their maturity in order to raise enough cash to meet the redemption needs. Thus, having a negative effect on the Net Asset Value of the fund.
In summary, there is no way to predict what the market will do in the future. The best bet for any Banker is to be prepared by staying current with the Fed’s movements and ensure customers are well diversified in all aspects of investments, including international markets. Do not make a knee jerk reaction once rates do move and you see the valleys and spikes associated with it. The only way to realize your loss is to cash in. Stay in the game for the long haul and remember what goes down, must come up!
Will they or won’t they? We’ve been hearing that the Federal Reserve is going to increase rates for nearly a year now, which reminds me of a story read to me as a child.
