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Fed Funds Fatigue

Meridian Points

All the talk about the Federal Reserve Bank raising interest rates is giving me a headache. Television’s talking heads are babbling away, the stock market is going down and the Vols are putting everyone in a sour mood.

Fed chairperson Janet Yellen indicated that a rate increase is likely before year-end, either later this month or in December. Apparently the economy has recovered from the Great Recession of 2008-2009 and unemployment is at a 7-year low. Should we care if they raise interest rates? If so, why and what does this mean for you?

Let’s take a minute to talk about how the Fed adjusts rates and why they do it. The Fed controls one key rate, the Federal Funds Rate, which is the rate that banks charge each other for overnight loans. This represents the “cost” of money to banks. This rate stands at .25% (¼ of 1%), which is a big reason why your bank does not want to pay you much more than .25% when you buy a CD.

You may be wondering just how a rate increase will affect your own finances, and how quickly.

The first thing you need to know is that your bank cannot wait for the Fed to raise rates. The prime lending rate will immediately increase, which means that for your home equity loan, business lines of credit, variable rate adjustable mortgage and credit card rate will cost you more. If your Home Equity loan is now 3.5%, it will immediately increase to 3.75%. Don’t expect to see fixed mortgage rates go up right away; they are tied to the 10-year Treasury, a longer term rate that isn’t necessarily affected by a Fed rate hike.

The second thing you need to know is that CD rates and interest paid on deposits react much more gradually. This also makes the bankers smile. Do not expect your bank to pay you more interest just because the Fed raises the Federal Funds Rate. It will take a long time, and several Fed rate increases, before we see much effect upon what banks are willing to pay you. This is reminiscent of how gas prices at the pump go up immediately following a price increase of a barrel of oil. Yet it takes a while for pump prices to go down when crude oil declines.

So what should you do? If you have a variable rate mortgage, it’s probably time to consider re-financing to a fixed-rate loan. If you have a home equity line of credit or variable rate credit card balances, get serious about making a plan to pay those down.

When it comes to your investments, don’t get lost in headlines and speculation. It is easy to second-guess yourself when it comes to money. Stick with what you know is right for your long-term goals; a cash reserve, a healthy savings pace, and low consumer debt will get you to the finish line, regardless of monetary policy.

As always, call or email me with any questions that you have.

This column was featured in the October 4 Knoxville News-Sentinel. You can read it here: Interest Rate Speculation is Wearing Thin

Meet the Author

Tom Coulter, CPA


Tom is the President and a founder of Meridian Trust. Tom graduated from The University of Tennessee, Knoxville, in accounting with honors, in 1978. Tom previously worked for the international accounting firm, Deloitte. He later joined the financial medical advising firm, FIS Associates, before founding Meridian Trust in 1997. Tom has worked extensively in retirement planning, taxation, estate and financial planning and investment management. He is a Certified Public Accountant, a member of the American Institute of CPAs (AICPA), and the Tennessee Society of CPAs (TSCPA).

Tom is also credentialed as a Personal Financial Specialist (PFS) by the AICPA.