4 ways interest rate hikes affect your clients finances

Wealth Solutions

4 ways interest rate hikes affect your clients finances

The interest rates that shape the economy and your clients’ portfolio could rise soon.

Recent violent swings in global stock markets have thrown the Federal Reserve and its interest rate decision squarely into the world’s spotlight.

Federal Reserve Chairwoman Janet Yellen, the nation’s top financial policy maker, and the Federal Open Market Committee (FOMC) are responsible for the highly anticipated decision. Known as the Federal Funds Target Rate, it sets the basis for what banks charge other banks to borrow money, and is the starting point for many consumer-facing interest rates like credit cards and auto loans.

Rates remain near zero in an effort to continue spurring growth after the Great Recession. Much of the economic data watched by the Fed is slowly improving, and Yellen and many of her FOMC colleagues believe a rate hike will come before 2016. The timing of the hike is key because rising rates could spook U.S. and global investors, causing further market volatility.

This most recent round of interest rate speculation began in mid-August over fears of slowing economic growth in China and after WTI oil, the U.S. benchmark, fell below the key $40 per barrel mark. After record highs in May, markets entered correction territory, defined as a decline of 10 percent or more, and endured several rocky weeks of trading. Yellen mentioned the recent economic and market turbulence as reasons for keeping rates unchanged in September. Meanwhile, Wall Street anxiously awaits the Fed’s eventual decision to finally raise interest rates.

Whenever that decision does come, Main Street could be deeply impacted by a rise in interest rates. Here are four of the most common ways rising rates could impact your clients.

  • Mortgages and vehicle loans – If it costs more money for banks to borrow money, it’s likely that extra cost will be passed on to your clients. Whenever the Fed decides to hike interest rates, house hunters and car buyers should expect to pay a little more in interest down the road.
  • Bond values – Generally when interest rates rise, yields rise and the price of existing bonds fall on the resale market. If held to maturity, the full principal value of the bonds is returned subject to the creditworthiness of the issuers.
  • Student loans – Most student loans issued by the federal government are tied to the 10-year Treasury note, a debt instrument issued by the U.S. Treasury department. Here too, higher interest rates mean clients will pay more to borrow money for school.
  • Savings accounts and CDs – This is one area where higher interest rates are good news for your clients. When rates increase, your clients will earn more interest on their savings. Interest rates on CDs are usually fixed at the time of purchase. 

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