WASHINGTON (AP) — If you’re about to buy a home, shop for a car or borrow for college, the pros have some advice:
The Federal Reserve’s decision Wednesday to slightly raise its key interest rate, advisers say, should have little immediate effect on mortgages or auto and student loans. The Fed doesn’t directly affect those rates, at least not in the short run.
That said, rates on some other loans — notably credit cards, home equity loans and adjustable-rate mortgages — will likely rise soon, though only modestly. Those rates are based on benchmarks like banks’ prime rate, which moves in tandem with the Fed. After the Fed announced its rate increase, several banks said they were raising their prime rates to 3.75 percent from 3.5 percent.
And if the Fed should accelerate its rate hikes, eventually rates on other categories of debt, like auto loans, would rise, too. On Wednesday, the Fed predicted it would raise rates three more times in 2017, up from two in its previous forecast.
But those predicted increases are just that — predictions. A year ago, the Fed projected that it would raise rates four times in 2016 but has ended up doing so just once.
Mortgage rates had been surging before the Fed acted, for reasons that had little to do with the central bank. Rather, Donald Trump’s election as president — with his pledge to slash taxes, loosen regulations and increase infrastructure spending — has raised the prospect of faster economic growth and inflation.
In response, the rate on the 10-year U.S. Treasury note has jumped about half a percentage point. Long-term mortgage rates tend to track the 10-year Treasury. The average rate on a 30-year fixed home loan is up nearly in lockstep with the 10-year Treasury — to about 4.1 percent from 3.5 percent.
“The Fed isn’t what’s influencing mortgage rates right now,” said Greg McBride, chief financial analyst at Bankrate.com.
Nela Richardson, chief economist at real estate brokerage Redfin, said:
“Mortgage rates will increase but not too much. As long as the Fed remains a trillion-dollar investor in the U.S. mortgage system, a moderate pickup in short-term rates won’t dampen the strong home buying demand we’ve seen as a result of a strengthening economy.”
Even if mortgage rates and other borrowing costs rise, they won’t likely do so in a straight line, which is why most people need not rush to lock in a rate.
“If you’re a first-time homebuyer, yes, rates are higher than they were in September, but they’re still reasonably attractive,” says David Geibel of Girard Partners, a wealth management firm in King of Prussia, Pennsylvania. “You can still get a very juicy mortgage.”
Tom Libby, an auto analyst for IHS Markit, noted that if the Fed raised rates three more times next year, car loan rates would eventually rise and likely slow sales. As much as 70 to 80 percent of new-car transactions are financed or leased and dependent on interest rates.
The zero-percent financing deals that have facilitated many auto sales could go away if the Fed keep raising rates, Libby said.
Some investment advisers said they wouldn’t recommend that clients make big changes in their portfolios despite the Fed’s forecast of three more rate hikes next year.
“We’re not going to be changing our investment outlook or our portfolios on a minor change in Fed outlook,” said Charlie Smith of Fort Pitt Capital Group in Pittsburgh. “The world is changing where the Fed is not the primary variable anymore.”
That said, rising rates can erode the value of longer-term bonds. So some investors may not want to own many bonds that mature more than 10 years out, whether they’re individual bonds or mutual funds that hold long-term bonds.
“Longer-term bonds are going to most likely be the biggest losers if the Fed embarks on a cycle of raising interest rates,” said Ken Moraif of Money Matters, a wealth management firm in Dallas. “Shortening up the duration of the bonds in your portfolio is a very good idea.”
Moraif has his clients now in bonds that mature in five to seven years.
Don’t go too short, though. Though you’ll lower your risk, you’ll also unduly limit your potential returns. Intermediate-term bonds may be best for some.
Over time, if the Fed steadily raises short-term rates, savings accounts and certificates of deposit would finally begin to sport more attractive yields. Just don’t expect that to happen soon.
“We’re going to have to go through a series of rate hikes before savings accounts and short-term CDs are attractive again,” Heider said.
As for stock investors, advisers say some categories of stocks stand to fare better than others if the Fed raises rates multiple times in 2017.
“More hikes would likely benefit the financial sector a little bit more than fewer hikes would,” said Mike Mussio of FBB Capital Partners, an investment adviser in Bethesda, Maryland. “And it may change how we position clients on the fixed-income side of the asset allocation.”
As interest rates rise, shares in bond-like stocks in the utilities, telecom and consumer staples sectors are likely to continue declining. So investors should consider moving out of those, Mussio said.
“It’s probably a good time, if you haven’t already, to consider rotating out of some of those sectors and into sectors that are a little bit more cyclical in nature and may not have the same interest sensitivity those sectors have.”
Among the more cyclical sectors Mussio says would benefit from rising rates are financials, energy and industrials.
On the other hand, a series of Fed rate hikes could finally bring some relief to savers who have been starving for a decent return on their money market accounts and certificates of deposit.
“They should start to get a little more rate of return on those money market assets in the coming months,” Mussio said.
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