How Rising Rates Could Affect Your Money


When Janet Yellen speaks, we ought to listen. Many people even spend time trying to predict what she’ll say next because her words have the power to move markets—and affect all of our personal finances.

This week, speculation has centered around whether she'd announce another interest rate hike. But on September 20, we learned that rates will hold steady in the current range of 1 to 1.25 percent.

Wait. Who’s Janet Yellen again?

Yellen is the Chair of the U.S. Federal Reserve System (a.k.a the Fed), our country’s central bank. She and the rest of the board do some important work, like setting the country’s monetary policy to guide us toward full employment (often defined as a national unemployment rate of 4.7 to 5.8 percent) and stable prices (or an inflation rate of 2 percent).

How do they do that?

The Fed’s go-to move is tweaking its target for the federal funds rate, which is what banks charge one another for loans and the benchmark for our rates on mortgages, credit cards and other debts, as well as savings accounts, CDs and Treasury bonds.

When the Fed lowers its target—easing its monetary policy—we can borrow more for less, which hopefully encourages spending and hiring and helps stimulate the economy. When the Fed raises its target—tightening monetary policy—our variable-rate debts (i.e. credit cards) get more expensive, but we stand to earn more on our savings.

Basically, the Fed’s a big deal, and what the Federal Open Market Committee (FOMC) says in its meetings has a big impact on our money.

What are they saying now?

Since the Great Recession, the Fed’s kept rates low in a bid to bolster the economy’s recovery. Things have been going pretty well—prompting the Fed to start raising rates in late 2015. But there's room for improvement. While the job market’s looking good, inflation is still struggling to rise from the historically low level it’s been stuck at for years. The recent hurricanes haven’t helped either: Their devastation is expected to damage our GDP growth.

This all deterred the Fed from raising rates this month. Instead, we're more likely to see a rate hike at the Fed's December meeting—plus a few more in 2018. This means there's still time to lock in a lower mortgage rate or double-down on paying off debt before it becomes even more expensive.

Anything else I should know about the Fed?

In October, the Fed will gradually start shrinking its current bond portfolio of $4.5 trillion to a more normal size of $3 trillion—another widely anticipated move that reinforces the Fed's confidence in our economic growth post-recession.

That should be good news for savers and bond investors. “When the Fed accumulated assets, one of its goals was to suppress long-term interest rates; the reduction of those asset holdings should have the opposite effect,” explains consumer banking expert Ken Tumin of “We should first see the effects on long-dated Treasuries. Those yields should rise, and that will likely lead to higher long-term CD rates.”

Investors may not want to make any portfolio changes just to catch a potential rise in bond yields, though. “Price swings when interest rates or fiscal policies start to move should be kept in perspective,” says Natalie Colley of Francis Financial. “Focus on the things that you can control, like sticking to a well-diversified portfolio and keeping fees as low as possible.”

This story has been updated to reflect the outcome of the September 20 Federal Open Market Committee meeting.