Interest Rates Are Rising- What You Should Do Now

A Short History Lesson
There’s an age-old saying, “Don’t fight the Fed”.  What this means is that the smart money pays attention and takes cues from the Federal Reserve Board’s actions, particularly as it relates to changes in interest rates.  The Fed Funds Rate is the interest rate set by the Federal Reserve for bank loans to each other for overnight deposits.  It also has both direct and indirect influence on many aspects of consumer interest rates.
Once the Federal Reserve changes the direction of interest rates, that upward or downward trend tends to be a multi-year process.  For example, the last time the Fed Funds Rate peaked was June 2006 (5.25%) which coincided with the peak in the housing market bubble and the beginning of the Great Recession of 2008.  From that peak, interest rates continued on a downward trend that ultimately dropped to between 0.0% – 0.25% until December of 2015 when the Fed raised interest rates to 0.5%.  There have been four rate hikes since then bringing the Fed Funds Rate to 1.5%.  The new Federal Reserve Board Chairman, Jerome Powell, has intimated that he will continue to raise interest rates in the future and analyst are predicting as many as three rate hikes this year. That would suggest that by year-end, the Fed Funds Rate could be 2.25%.  Note that as the Federal Reserve raises interest rates, most adjustable-rate loans from financial institutions (banks, credit unions, auto and consumer product lenders) will raise their rates almost simultaneously. 

5 Money Strategies You Should Consider Right Now

It is certainly my opinion that we have entered a multi-year period of rising interest rates which suggests a number of strategies you should consider:

  1. Home Mortgage. If you have an adjustable rate mortgage (ARM) on your home, you should consider whether it’s advisable to refinance to a fixed rate loan.  As I write this column, the interest rate for a 30-year fixed rate loan is about 4.5%.  The interest rate for a 15-year fixed rate loan is about 4%. If you plan to own your home for five years or more, locking in a fixed rate could be a smart money move.  The good news is that most ARMs adjust rates only once per year (on your loan date anniversary).
  2. Home Equity Line of Credit (HELOC). Interest rates on HELOCs are almost always tied to the bank’s prime lending rate which will closely follow the Federal Funds Rate.  If the Fed raises rates by 0.25%, you can expect your rate to rise by an equal amount at your next payment date.  With this rising interest rate environment, consider either paying off your HELOC or converting it to a traditional fixed rate mortgage.  If you already have a first mortgage on your home, this may mean refinancing to a new fixed rate mortgage that combines the two loans or, possibly, converting your HELOC to a fixed rate 2nd  As an added incentive to pay off your HELOC, the new Trump tax law has eliminated the interest deduction for these loans beginning this year.
  3. Credit Cards. According to com, the average interest rate on credit cards is 16.75%.  As the Federal Reserve continues to raise interest rates, expect your credit card rates to rise also.  Paying high non-deductible interest on credit card balances is a bad idea and a sure sign that your finances and money management are off-track.  If you have a 2017 income tax refund coming, paying off credit card debt might be an excellent use of those funds.
  4. Look for Higher rates on Savings & CDs. While the banks will immediately raise the rates on loans to you when the Federal Reserve raises their rates, they’re a bit slower to raise interest rates they pay  Here’s where you might want to do some rate shopping.  Whether you’re holding money in a savings account, money market account of certificates of deposit (CDs), first check what interest rate you are being paid, then visit for competitive rates on similar products.  If higher rates are available elsewhere, you’ll need to decide if it’s worth it to move.
  5. Consider shorter bond maturities. If you own bonds or bond funds in your portfolio, consider whether you should sell them in favor of shorter maturities.  As interest rates rise, values for existing bonds will fall.  This is particularly true for bonds with longer maturities (7-10 years or longer).  Over the past several years we have significantly reduced the average maturities for bonds we hold for our clients.

Being a good steward of your money dictates that you periodically review your investments and pay particular attention to potentially changing investment environments and be prepared to take appropriate action.  If you’re not confident making these types of decisions, consider hiring a professional investment advisor to assist you.  One good source to begin your search is  This is the site for Certified Financial Planner™ professionals…people who have completed the rigorous CFP® education program; have a minimum of three years’ experience and agree to abide by a strict code of ethics.  All CFP® professionals are legal fiduciaries and, by law, must place your interest ahead of their own.