For the last several years, the Federal Reserve has kept its Fed Funds Rate low. However, things might be changing in 2015. There is talk that the Fed is finally ready to think about hiking rates. A couple of years ago, there was a great deal of excitement about the taper of the asset purchase program, and how that might help rates. However, nothing came of it.
Recently, the Fed did finally put a stop to its asset purchases, but interest rate hikes have yet to come. The day of the interest rate hike may finally come next year, though. Even though the current Fed Chair Janet Yellen has talked of “patience” as policymakers await economic recovery, there are rumors that the Fed could raise rates sometime in the first half of 2015. If that is the case, we might see an increase in CD rates relatively soon.
Would it Really Help Your Returns?
Even with an increase to the Fed Funds Rate, chances are that CD rates wouldn’t suddenly reach the level we saw prior to the financial crisis of 2008. Instead, any rate hike is likely to be small, and any increase in CD rates is also likely to be small.
The economy is picking up steam, which means inflation is likely to be on the rise. As a result, it’s unlikely that an increase in CD rates would have a big impact on your portfolio. Indeed, your CD investment is still probably not going to keep pace with inflation. It will just be a way for you to see capital preservation, and there is a good chance that you would lose money in real terms due to inflation.
Other Impacts Higher Rates Would Have
Rather than worrying too much about CD rates, you should consider other areas of your finances that would be more likely to see impacts from rising Fed rates.
If the Fed Funds Rate does go up, you would likely see higher rates on your debt. That means that you would see your credit card interest rates rise. If you carry balances, this could impact your bottom line, since you would pay more in credit card interest. New debt, such as car loans and mortgages would also see higher rates. The increases on these interest rates would easily overset any gains to your CD rates, putting you behind.
Before you worry too much about trying to reposition your cash so that you end up higher CD rates, it makes sense to pay down your debt so that you aren’t subject to higher rates. If you can’t pay down your debt, consolidating it, or refinancing it to a fixed rate might help you out, since it would lock in the current rates, before things start moving higher.
With an economic recovery underway, and with the Fed thinking about raising interest rates, it’s time to re-evaluate your financial situation, and your plan. It’s probably a very good time to start tweaking your situation so that you are ready for whatever comes next.