Is it almost that time…time for the Federal Reserve to finally stop their ZERO interest rate policy that has been with us for more than 80 months. There is tremendous speculation that in the Fed’s next meeting (September 16-17) “zero rates” will die and an entirely new cycle of higher interest rates will begin. Naturally, I’m getting a lot of nervous questions about how a rate hike can affect the Main Street consumer.
After all, most investors are already anxious with the extreme market volatility we’ve seen over the past several weeks, coupled with the possibility that China’s economy is slowing. As you and I sit back and wait to see what the Fed decides, some of the biggest names in the financial world are out in full force giving their two cents. Notables like bond guru Bill Gross and Rick Rieder, Blackrock’s CIO of Fixed Income are calling for the September rate hike, while others like the International Monetary Fund’s Christine Lagarde warns that the global economy isn’t ready.
Raising rates is a double edge sword. Interest rates have been at historic lows since 2008 and the Fed hasn’t raised rates since 2006. This means that borrowing money for most people and companies has been tremendously inexpensive. So can’t we just keep it like that? Well, we could- but money can’t be almost “free” forever. Sooner or later we have to rip off the band-aid and have rates go back to a more “normal level”. Remember, the Fed Funds Rate which the Fed has kept at zero for so long, was in the 4 to 5% range in 2006 and 2007.
The question remains whether or not now is the right time. On one hand, raising rates might motivate people to get out and borrow money now before it gets more expensive. Raising rates also signals that the “powers that be” are confident in our U.S. economy and that it’s strong enough to handle it. On the flip side, higher interest rates will make the cost to borrow money higher, hence putting a damper on consumer spending.
Let’s get back to Main Street consumers. How- and will- a Fed rate hike affect you? While I don’t think that a small percentage rate hike will hurt consumers in the short run, over time a series of increased rate hikes will definitely impact all of us. We can’t influence the Fed’s decision, but now is the perfect time to make some strategic moves to make sure your portfolio is ready for a rate hike. Here are three great places to start:
*Reduce your variable debt. Variable rate debt includes debt like student loans, auto loans, and home equity lines of credit. Even if you have debt in only one of these areas, do what you can to get the debt down. Again, while you might not see the effects of one small rate hike, you will definitely feel the pain down the line if there are additional rate hikes.
*Think about transferring your credit card balance. Credit card interest rates are likely going to rise if the Fed raises interest rates. If you have a lot of credit card debt, your monthly payments could increase substantially. Now is the time to look for zero-percent balance transfers or introductory rates.
*Consider refinancing your mortgage if you have an adjustable rate mortgage. Again, if the Fed raises interest rates by a small percentage, the economic impact of financing a home will also be minimal. But with each interest rate hike that occurs down the line, the economic effects will become more severe. This might be the right time to lock into a fixed-rate mortgage.
Just as I’ve been telling you not to panic over market volatility, China, and the emerging markets, panicking over a possible Fed rate hike isn’t going to get you anywhere either. You can’t control the markets or the macroeconomic state of the world, but you can take action- starting today- to reduce your debt so that you don’t have to suffer undue economic pain down the road. I talk about reducing debt in a lot of my articles and how it can reduce stress and increase happiness in retirement. If you haven’t started taking those steps yet, there’s no time like the present.
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