gmhTODAY 07 gmhToday Mar Apr 2016 - Page 74

Interest Rates On The Rise T he Federal Reserve increased the short-term Fed Funds interest rate range to 0.25%-0.5% at their December, 2015 Federal Open Market Committee (FOMC) rate setting meeting. This is the fi rst rate hike since 2006 and, while it is a vote of confi dence in the economy it leaves investors wondering how fast rates will go up and how high they will go. dependent. Theoretically, they could move faster or slower depending on how the jobs market, the U.S. economy and the infl ation outlook perform. So, why raise rates now? Given that pace, Fed offi cials don’t anticipate the Fed Funds rate going above 3% until 2018 (based on the average of estimates). Additionally, the Fed feels that the 3% to 4% range they hope to reach in 2018 may be the logical place to stop hiking rates since this range is consistent with the long-run estimates of where they think the Fed Funds rate should be. Though improved, the U.S. economy isn’t fi ring on all cylinders and infl ation isn’t out of control, so it seems like a strange time to start increasing interest rates. However, the Fed is concerned that infl ation may increase soon given the low level of unemployment. They don’t want to slow our current economic expansion, but they do want to reset some of their monetary policy tools and avoid having infl ation become a major concern. How fast will interest rates rise? By Daniel T. Newquist, CFP®, AIF® Dan Newquist, CFP®, AIF®, Principal & Senior Wealth Advisor with RNP Advisory Services, Inc., a registered investment advisor, Morgan Hill. He can be reached at 408-779-0699 or dnewquist@ RNPadvisory.com. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company. The Fed indicated that they will take a gradual approach to increasing interest rates. The economy isn’t overheating and infl ation isn’t out of control, so the Fed will fi rst attempt to move interest rates to be less stim- ulative. This should help the Fed reset their interest rate policy tool and allow them to better react to future recessions or geopolitical risks that may shock the economy or markets. Based on their December estimates, the Fed is forecasting approximately four additional interest rate hikes in 2016. This would move the Fed Funds rate from the current range of 0.25%-0.5% to 1.25%-1.5% by the end of 2016. This a pace that is much slower than previous rate hike cycles. The Fed also stressed that future rate hikes will be data How high will short-term rates go? According to the FOMC’s December press release, they are predicting a rate increase of around 1% per year for the next three years. How does this impact you? Rising interest rates makes it more expensive for businesses and consumers to borrow money on everything from lines of credit to auto loans to mortgages. Investors may also feel the effects of rising rates. Retirees, and others who seek income from bank accounts, CDs, Bonds and other fi xed-rate investments could benefi t from higher yields. For U.S. stocks, there are many economic bright spots that could help push returns higher, but companies who rely heavily on borrowing could face higher costs which could impact their bottom lines and stock price. Your fi nancial advisor can help you under- stand the impact of rising interest rates on your investment and retirement accounts and address any questions or concerns you may have. This article is intended for educational purposes only. It is not intended as investment advice. Always consult your fi nancial or tax-planning professional for guidance with respect to your specifi c situation. 74 GILROY • MORGAN HILL • SAN MARTIN MARCH/APRIL 2016 gmhtoday.com