There was much speculation that the Federal Reserve would raise interest rates in September, the first rate increase in nearly a decade, but the pundits were wrong. As detailed in this story “Federal Reserve decides not to raise rates leaving them near zero… for now“, The Fed opted not to raise rates in the immediate future and will keep its key interest rate near zero, where it has remained since the financial crisis of 2008.
However, the Fed did leave open the possibility of a rate hike before the end of the year. The Fed’s operating committee meets again in October and December so expect more speculation about rate increases next month and at the end of the year.
What does it all mean for the consumer and the investor?
Many financial advisors, mortgage companies and banks will use the rate hike—or, more accurately, the rumor of a rate hike—to encourage drastic action: buy a home, buy that car, divest in X financial products and invest in Y instead.
My advice is don’t act rashly. If you are looking to make a major purchase, a new home or a car, for instance, rates are extremely low and it’s unlikely that they will increase drastically any time soon.
According to the Fed, the average 30-year fixed mortgage rate is currently 3.9%. A decade ago it was 6% and 20 years ago it was 7.5%. If you’ve done your research and have a solid plan in place, now is a great time to buy, but so will next year. Just be sure your new house payment doesn’t erode your retirement savings plan.
The impact on investments like stocks, mutual funds or ETFs will vary based on your investment strategy. August was a volatile month for stocks, due in large part to slowdowns in China and the expected impact on emerging markets. When investing in stocks, you always have to anticipate that there will be volatility but stocks also offer the greatest potential for long-term growth. A rate hike might mean that you tweak your strategy a bit. But if you’re investing for the long-term, modest rate hikes and rumors of modest hikes should not precipitate a dramatic change in your strategy.
And if an advisor is eager for you to sell one investment in order to buy another, be sure that the commission on that transaction is not his true motivator.
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