Interest rates are going up. The Federal Reserve hiked rates once in 2015, once again last year and twice in 2017. While a rate hike isn’t expected this Wednesday, the Fed has predicted it will raise rates one more time this year.
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.
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Higher returns for savers
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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. When savings rates increase, put your money in an interest-bearing account.
“Rising interest rates would benefit elderly Americans on fixed incomes and others who rely on interest income to help cover their living expenses,” says Alan MacEachin, corporate economist with Navy Federal Credit Union.
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Most broad-based measures of prices have indicated inflation has been a virtual no-show in the U.S. in recent years. The central bank’s target for inflation is 2 percent, but it has been falling short of that goal.
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,” says Daniil Manaenkov, assistant research scientist at the Research Seminar in Quantitative Economics at the University of Michigan.
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A credit bubble rightfully received some of the blame for the financial crisis of the past decade. 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,” says Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.
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,” says Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.
As the Federal Reserve embarks on what officials have called “normalization” (that is, a 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,” says David Nice, former senior economist at DS Economics in Chicago.
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Would-be homebuyers may get off the fence
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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,” says Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.