Business

7 benefits of an interest rate hike

The Federal Reserve boosted the rate this week

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A proposal from the California Association of Realtors could encourage older homeowners to sell.
Dreamstime A proposal from the California Association of Realtors could encourage older homeowners to sell.

Interest rates are going up. The Federal Reserve hiked rates once in 2015, once again last year and twice in 2017.

And on Wednesday, Fed officials voted 7-2 after a two-day meeting to increase the rate by a quarter percentage point to a target range between 1.25 percent and 1.5 percent.

Yes, the increases mean it will cost more to borrow. But you’ll benefit from getting better rates on high-yield certificates of deposit.

Healthier returns on CDs are only one gain from the Fed’s rate-raising campaign. Here’s how you can take advantage of other positive outcomes from Fed rate increases.

1 Higher returns for savers

If you’re a saver, low interest rates have brought about the financial equivalent of a long drought. Any improvement, even modest, is welcome and overdue.

“Rising interest rates would benefit elderly Americans on fixed incomes and others who rely on interest income to help cover their living expenses,” said Alan MacEachin, corporate economist with Navy Federal Credit Union.

2 Tamed inflation

Most broad-based measures of prices have indicated inflation has been a virtual no-show in the United States in recent years. The central bank’s target for inflation is two percent, but it has been falling short of that goal.

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If the Fed achieves its objectives in steering the economy, inflation should remain under control.

A positive inflation scenario after a rate increase might include “lower prices of imported consumer goods, due to a likely higher exchange value of the dollar if our domestic rate increases are not matched by policy tightening in other major economies,” said Daniil Manaenkov, assistant research scientist at the Research Seminar in Quantitative Economics at the University of Michigan.

3 More lending

A credit bubble rightfully received some of the blame for the financial crisis in 2007. In the aftermath, lending came to a complete stop.

Lending has resumed.

“Banks may have a greater incentive to loan out reserves at higher interest rates, and the increased flow of additional credit would boost economic growth,” said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.

Low-rate credit cards still are available, but availability will dwindle as interest rates rise.

4 More interest income for retirees

As a rate boost brings better returns to savings vehicles, senior citizens should enjoy better paydays by putting their money in CDs and savings accounts.

“Higher interest rates on CDs and other financial instruments will particularly help older Americans trying to live on their retirement savings,” commented Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.

As the population ages, many more Americans will come to appreciate even modest increases in interest income during retirement when they buy certificates of deposit.

5 Stronger dollar helping US travelers

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Everyone loves a bargain, right? A strong U.S. dollar has meant significant savings for Americans heading abroad because it gives U.S. travelers more buying power.

Predicting moves in the foreign exchange market is difficult, but Snaith and other economists said the dollar could strengthen further as the Fed boosts rates.

Fed tightening “is likely to mean a somewhat higher dollar, so people traveling to Europe will do well,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C.

If you’re traveling this fall, shop the best airline and travel credit cards.

6 Stocks will trade on fundamentals

As the Federal Reserve embarks on what officials have called “normalization” — backing away from record-low rates — stock prices may start to make more sense and not reflect the central bank’s easy monetary policy quite so much.

“A normalization of rates would return the focus to market fundamentals and off of focusing on the nuances of each Fed statement,” remarked David Nice, former senior economist at DS Economics in Chicago.

7 Would-be homebuyers may get off the fence

As the Fed continues to raise rates, higher mortgage rates will follow. If the prospect of higher mortgage rates compels you to a home sooner than later, you won’t be alone.

“Higher mortgage rates could push buyers off the fence — increasing demand, increasing prices and increasing home equity so that more people can sell their homes,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

By applying today for a mortgage, your offer will be more competitive than other homebuyers who don’t have preapprovals.

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We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

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