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What Rising Interest Rates Mean for You Key Interest Likely to Rise Soon 2010 Rate 2011 2012 2013 2009 2014 2015 Periods of recession 5102 4102 3102 2102 1102 0102 9002 The Federal Reserve is poised to raise the federal funds rate, an important benchmark that indirectly affects the financial markets and many consumer rates. Federal funds rate Paul Volcker targeted money supply growth, allowing short-term interest rates to approach 20% in 1981. He is credited with “breaking the back” of inflation. 20% 15% 10% In response to the financial crisis, Ben Bernanke cut the Fed funds rate to zero, expanded the Fed’s balance sheet to 25% of GDP and used unconventional measures to stabilize the economy. Alan Greenspan oversaw an era of low inflation and steady economic growth known as the Great Moderation. The era ended with the bursting of the tech bubble. Janet Yellen, the current Fed chair, now faces the task of raising rates after they have been near zero for more than six years. 5% 0% 1980 1985 1990 1995 2000 2005 2010 2015 Source: St. Louis Federal Reserve Effective Federal Funds Rate (FEDFUNDS), Percent, Monthly, Not Seasonally Adjusted. Data as of July 2015. Expected Impact of Rising Rates on Investments and Personal Finances Positive impact Negative impact Uncertain impact Short Term Cash CDs Savings Yields on cash are expected to rise but the impact on various cash-related investments will vary. The rates that CDs pay should rise but not all CD rates will necessarily rise by the same amount. Bank savings rates should rise gradually, benefiting investors with savings accounts. Stock market Financial stocks Utilities stocks Stocks typically have performed well ahead of a rate increase and during the first year afterward. Higher interest rates could mean income gains and more investor confidence in the financialservices sector. As interest rates rise, utilities stocks tend to underperform as investors move to bonds to lock in their higher yields. Intermediate Term Intermediate-term bonds Higher yields mean lower prices. When rates go up, price declines for intermediate-term bonds tend to be greater than for bonds with shorter maturities. Adjustablerate mortgages (ARMs) Usually tied to short-term rates, the rates on ARMs will increase as the Federal Reserve raises its key rate. Auto loans These tend to move along with short-term rates, but auto-loan rates will vary depending on sales incentives and other factors. Homeequity loans Short-term bonds These usually track short-term interest rates and are likely to gradually move higher. Short-term bond investors can benefit when rates rise, but that can be offset initially by price declines in short-term bond funds. Long Term Asset-based loans Rates on loans such as pledged asset lines and margin loans may gradually rise. These types of loans still can be a low-cost borrowing choice for investors who can mitigate the risk. Mortgage rates Long-term bonds While long-term bond prices are highly sensitive to changing bond yields, long-term bond yields won’t necessarily rise when the Federal Reserve increases its key rate. Long-term bond yields are tied more to growth and inflation expectations. Fixed mortgage rates generally track yields on 10-year Treasury notes, meaning that an increase in the Fed’s key rate doesn’t necessarily mean that mortgage rates will quickly move higher. Source: Schwab Center for Financial Research Important disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. ©2015 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. C0815-5295 (08/15)