Updated Sept. 21, 2022, at 1:10 p.m. CT
The sky isn’t falling, but interest rates are rising.
When the Federal Reserve raises interest rates, it’s easy to feel overwhelmed and wonder: How does this impact me?
Whether you’re borrowing or saving, Dupaco continues to have your best interest in mind. So, we’ve rounded up answers to some common questions about a rising rate environment—and how it impacts you:
- What’s the Fed’s purpose?
- What happens when the Fed raises interest rates?
- How do rising rates impact the stock market?
- How do rising rates affect bonds?
- How do I manage my money now?
What’s the Fed’s purpose?
The Federal Reserve, also known as the Fed, is the central bank of the United States. It sets U.S. monetary policy to promote maximum employment and stable prices in the U.S. economy.
The Federal Open Market Committee meets regularly and, among other tasks, votes on whether its current target range for the monetary policy rate is appropriate for the economic climate.
This target rate, also known as the federal funds rate, is the rate that banks and credit unions pay (or receive) to borrow (or lend) money to each other.
As a rule, the Fed raises its interest rate to slow down a strong economy or inflation. On the flip side, the Fed lowers the interest rate to help speed up a weak economy.
What happens when the Fed raises interest rates?
The federal funds rate directly affects another rate—the prime rate. When the federal funds rate increases, so does the prime rate.
The prime rate is an important index used by financial institutions (like Dupaco) to set rates on many adjustable-rate loans and deposits. (Some adjustable rates can change when the prime lending rate changes.)
What does this mean?
- The cost of borrowing money becomes higher.
- Higher interest rates encourage more people to save because savings rates typically increase in time too.
These factors lead to less money circulating in the economy, which can reduce the level of inflation.
How do rising rates impact the stock market?
Unfortunately, there’s no way to predict how the stock market will react to rising interest rates.
But typically, rising interest rates aren’t good news to stock investors. And here’s why:
- Companies might be hesitant to borrow capital to grow their businesses. This can result in lower revenues and smaller returns for investors.
- When investors and savers can earn a higher rate on bonds and share certificates, they might move some of their stock holdings to bonds or share certificates. That reallocation could lead to lower valuations of stocks.
How do rising rates affect bonds?
The price of bonds is inversely related to interest rates. An increase in interest rates will cause an equivalent drop in the price of bonds.
For example: Let’s say you own a five-year bond with a 2% coupon when five-year rates are at 2%. Your bond should be priced at par. But if five-year rates go up to 3%, your 2% bond now has less value.
How do I manage my money now?
While a lot can feel out of your control with rising interest rates, there are steps you can take to protect and manage your money:
Refinance your debt
The interest rates on several kinds of debt are tied to the prime rate. And the loan rates you pay might increase as the prime rate climbs.
Hint: Dupaco uses the prime rate for Visa credit cards, home equity lines of credit, commercial loans and student loans.
While personal and auto loans aren’t directly tied to the Fed’s rate changes, these rates are also likely to increase eventually. (The U.S. Treasury and other markets influence them.)
So now is a great time to think about refinancing debt. You might be able to bundle high-interest debt to make your payments more manageable.
Debt consolidation might take the form of a:
- Balance transfer: You might be able to save money by transferring credit card balances to a low-rate Dupaco Visa credit card.
- Debt consolidation loan: If you own your vehicle, you might be able to use it as collateral to get a better interest rate.
- Home equity line of credit: When you have equity in your home, you can consolidate debt with a low-interest home equity line of credit or home equity loan.
A free Dupaco Money Makeover can help you review your entire financial picture to create a personalized plan.
Review your home loan
When interest rates are historically low, many homeowners opt to refinance their home loan into a lower-rate loan.
Mortgage rates change daily. If you haven’t refinanced your home loan in awhile, it’s worth finding out whether you’d benefit from it before rates continue to climb.
Save for your future
The prime rate and U.S. Treasury can influence other Dupaco products, like savings accounts. But there is no direct relationship between them, said Dupaco’s Mike Libbey, treasury financial manager.
“It’s common for changes in deposit rates and loan rates at financial institutions to lag behind changes to U.S. Treasury yields,” Libbey said.
When deposit rates rise, you’ll earn even more in your interest-bearing savings accounts.
Stay calm, and balance your portfolio
Alarming headlines get the most clicks. But stock market news nearly always sounds more distressing than the reality. (Long-term growth can usually make temporary losses obsolete.)
Take this time to ensure your portfolio is properly balanced for the changing market conditions.
Speaking to a financial adviser will help ensure your investments are where they need to be to grow at a healthy rate.
Depending on your goals and comfort level, you might explore moving some of your money into a fixed-rate investment (like a share certificate).
“There are fixed-rate solutions that don’t have exposure to the stock market if that concerns you,” said Dupaco’s Mark Hoaglin, CFP, senior vice president of Wealth Management & Insurance Services. “In this volatile interest rate environment, we can help you with your fixed-rate investment needs too.”