Q&A: How Will The Fed’s Rate Hike Affect Markets And Consumers?

The hike is slight and it might take some time before consumers see any major changes.

The Federal Reserve raised its key interest rate from near zero up to 0.25 percent to 0.5 percent. It’s the first time the United States’ central bank has raised rates since 2006 and is a sign that they believe the country is on firmer footing and may see inflation in the future.

But what does that actually mean for Minnesotans and the country as a whole? TCB fired off a few questions to Peter Eckerline, managing director of wealth management, at Eckerline Wealth Management Group. Below, he gave more details about how it might impact financial markets and housing, both of which can be affected by rising Fed rates.

TCB: The market rose following the news of the rate increase. Why was Wall Street happy?
Peter Eckerline: The market moved up after the announcement by the Federal Reserve for a few reasons. The Federal Reserve had carefully orchestrated the announcement and it was expected by most investors. There may be a sigh of relief on Wall Street that we have that out of the way and it’s one less thing to worry about. Or it could be that the market was a little over-sold with tax loss selling and was due for a bounce. It’s very difficult to every know what moves markets.

How will this affect markets going forward?
Our CIO expects stocks to outperform bonds, which historically has happened in a rising-rate environment. It’s still way too soon to determine how many rate increases there will be and how fast they will occur.

Who is most impacted by the rate hike?
The initial impact for everyone will not be significant because it’s such a small change. Long term, it will probably be better for savers, because they will be able to get higher interest on their deposits and be more expensive for borrowers related to auto loans, home loans and credit card debt.

Which investments become more attractive with a rate hike? Less attractive? Are there any winners or losers?
Investors should be looking at their portfolio and making sure their allocations fit their goals. The end of the year is always a good time to do a review and make sure you’re on track and incorporate any changes to your goals into your overall plan. Most investors do best sticking to a plan and not reacting to short-term changes in the markets.

How does the rate hike affect the housing market?
I think the rate is not going to be significant for the housing market unless rates start going up substantially, which our CIO does not expect in the short term. It may actually provide an impetus for people to make a purchase that they’ve been contemplating for some time and move ahead with now that [rates are going up]. Longer term, higher interest rates can be a negative for the housing market, but it will depend on how far the rates move and how fast. The current outlook by our CIO is that they will not rise significantly in the next couple of years.