First rate hike by "the Fed" in over 9 years - quick synopsis

The Federal Open Market Committee (the Fed), announces first rate hike in over 9 years

The Fed has just announced a rate increase of the federal funds rate of a quarter of one percent: Since 2008, as most of us know, returns on short-term bonds have been at or near zero percent, which is a consequence of the Fed keeping the Federal Funds rate (the rate at which it will lend banks virtually unlimited amounts of money short-term) at 0.125%. The last increase was in June of 2006, going from 5% to 5.25%. It then decreased from that rate in a little more than two years, to close to the zero rate that we have experienced thus far. The average Fed Funds rate has historically been 3.5% to 4.0%, so this had been a considerable amount of stimulus.

As the markets react there are a few things to keep in mind. First, despite the headlines soon to be blaring from every financial section of every paper in the country, the rate increase is very modest, going up a quarter of a percent, from .125% to .375%. This is a small first step in a long journey toward the long-term average. After this increase, the Fed will evaluate the consequences before deciding to make future changes. Future increases are expected to be a quarter percent at a time. If the economy slows, or if there are signs that inflation is falling below the Fed’s 2% annual target, it could delay the next move by months. The Fed wants to be cautious of going too fast and avoiding any kind of serious economic pullback, especially as a repercussion of any increases.

In the short term, what will this increase mean to the consumer? Most likely, the areas that will see the biggest effect are in increases for credit card rates, and home equity and car loans. Mortgage rates will likely also rise, though with this increase expected, many banks have factored it in, though we can see an increase as they will look to the next possible increase.

What will happen next? With this news, and end of year selling and re-positioning of portfolios, there may be some more volatility the last two weeks of the year in the markets. However, this rate increase has been in the works for quite a while, and a number of economists view this as a step back to “normalcy”. For investors, the value of Fixed Income investments (bonds) may go down in price as rates increase. However as rates increase more, and those investments mature, it allows for that money to be re-invested at a higher rate than before an increase. For companies that need to borrow cash, as rates go up they need to pay more for borrowing funds. Likewise the same for the United States, which borrows money through its’ sale of Treasuries.

Bottom line: We have been at record low interest rates for years, and over the long term, it is a benefit for us to cautiously move to an interest rate environment to what could be maintained on a more sustained basis.

If you desire an appointment, have any questions on any of this material, or any other financial subjects may relate to your own financial circumstance, please reach out to us at the contact information below:

Sincerely,

Brian Cohen, CCO; email: brian@landmarkwealthmgmt.com; phone: 631-923-2487

Chris Congema, CFP®; email: chris@landmarkwealthmgmt.com; phone: 631-923-2486

Joe Favorito, CFP®; email: jfavorito@landmarkwealthmgmt.com; phone: 631-930-5336

Direct office email: info@landmarkwealthmgmt.com

Direct phone, Brooklyn: 718-514-1587

Direct phone, Melville: 631-923-2485

Landmark Wealth Management, LLC (www.landmarkwealthmgmt.com). The firm has offices located in Brooklyn and Melville, NY.

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This communication is from Brian Cohen, Chris Congema, CFP®, and Joe Favorito, CFP®, financial advisors at Landmark Wealth Management, LLC, a Securities and Exchange Commission Registered Investment Advisory firm. The information in this blog is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax, legal, or investment advice from an independent professional / financial advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.