In December, after seven years of record low interest rates, the Federal Reserve (the Fed) raised interest rates by 25 basis points (or 0.25%). It cited an improving economy and labor market as reasons for why now was the best time to begin to raise interest rates.
Marylanders may see a small increase on variable rate products such as credit cards, lines of credit and loans as a result of this hike. Essentially, financial products like these tied to the prime rate will directly reflect this Fed decision.
The financial impact may be minimal given the small nature of the hike, but interest rates could not stay near zero forever. At some point, the low interest rate environment had to end as the economy improved, and historically low interest rates would have to “normalize.”
Albeit, the Fed may raise rates a few more times in 2016, the good news is that the U.S. economy, as measured by gross domestic product (GDP), is improving and in 2015 grew by roughly 3% to 4%, according to forecasts.
Maryland and our country benefit when our economy improves. Rates rising will also benefit savers, such as baby boomers, who typically rotate away from riskier assets, like stocks, in their golden years and rely on fixed incomes based on savings accounts, CDs and bonds, among other sources of income. Traditional fixed income products depend on market interest rates, and as rates increase (albeit slowly), savers will be able to earn more fixed income without taking on unwanted risk.
Whether a person banks at Howard Bank, Susquehanna Bank or another financial institution, the keys to being in a sound financial place in response to the recent rate hike are as follows:
- Pay down revolving debt to ensure a good credit score and limit how much interest is paid on the debt. High credit scores qualify for the best financing terms. Rates are still low, so do not accept high interest rates on items such as car loans or credit cards without comparison shopping.
- As a saver, larger balances typically qualify for better interest rates on your deposits. Talk with a banker and check to see if you are in the best accounts that are offered, given your financial profile. And watch out for monthly maintenance fees.
- The stock market is off to a rough start in 2016. For younger individuals and families, this is not a huge problem, because time is on their side. Stocks are risky, but historically, their returns outweigh the risk and investors come out ahead in the long run. For individuals close to retirement, revisiting your asset allocation may be beneficial.
Not that long ago, football quarterback Aaron Rodgers said it best when talking to reporters and fans when his team was off to a rough start: “R-E-L-A-X.” The recent interest rate hike had to happen sooner or later, and if a person or family has a solid financial profile — spend less than they make each month, save for a rainy day and retirement, and do not have credit card debt — the recent Fed interest rate hike will minimally impact them.
Currently, the financial world is looking at China and trying to figure out the status of its economy. China is the second largest economy in the world after the U.S.; if its economic growth is slowing down more than anticipated, this could adversely impact other markets. Moreover, it could possibly result in the Fed not raising rates as much as it would have liked to this year. In addition to the recent negative press regarding China’s economy, the many major European economies still have high levels of unemployment and high national debt levels.
Given these challenges, the U.S. economy and its economic growth appear to be a bright spot in the global economy.
Mark A. Johnson is an assistant professor of finance at Loyola University Maryland’s Sellinger School of Business and Management, which has a campus in Columbia. He can be contacted at 410-617-2473 or [email protected].