Download What Rising Interest Rates Mean for You

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.
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C0815-5295 (08/15)