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Interest Rate Changes and Your Clients' Planning

With the announcement of a 25 basis point increase this past week, the Fed surprised some observers by also stating a goal for 21017 of three more such increases in the federal funds rate. This should prompt us to talk with our clients about how they might see their planning and finances affected by the changes next year.

The first and most obvious impact is that it will get a little bit more expensive to borrow money as the rate increases take effect. Most of our clients will see an increase in mortgage rates and credit card interest rates following hard on the heels of each increase. It may not seem like much – a quarter of one percent – but, over time, that sure adds up. If a client is considering a new home purchase or a refinancing of an existing mortgage, they should act quickly to avoid paying more. Even though rates have been at historic lows, they will be going up. By the same token, clients with credit card balances may want to consider paying down that debt more quickly to avoid more interest.

A second consideration, on the opposite side of the deal, is for clients to understand that the increase in rates will not benefit them as lenders where, for example, they hold certificates of deposit or maintain savings accounts. The banks holding their money will be slow, at best, in passing along the increased rates to those savers. The extra profit to the banks will not be shared with the sources of capital, at least not at first. So if you are waiting to see a boost in your interest income, keep on waiting.

Turning to bonds in clients’ investment portfolios, the common wisdom is that yields will slowly rise while the price of the bonds will decrease. However, given recent trends in the marketplace, there may be little impact at this point on yields and, therefore, prices. Over time that will likely change but there appears to be no need to take hasty action now. Clients may want to diversify their bond holdings and even shift some money into more cash like holdings to avoid any significant price drop in their portfolios. Consult your adviser first!

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