With interest rates expected to rise slowly, conventional wisdom says an uptick in rates could rattle the economy.
"While many pundits have claimed that rising interest rates are good news for the stock market, our research finds that the stock market performs dramatically better during a falling interest rate environment than a rising rate environment," says Robert Johnson, president and CEO of The American College of Financial Services and lead author of the book, Invest With The Fed. But even so, not all asset classes suffer when rates go up. "Commodities, precious metals, gold, energy, and others perform much better," he adds.
The impact of higher rates is not black or white. "It’s all about positioning. If you’re caught in a reactive position to an interest rate shift, whether up or down, it can have a negative effect," says Leslie Bocskor, managing partner at Electrum Partners. For example, she says, "Should you be about to experience the retirement of some high interest debt when interest rates are falling, you could find your yield effected dramatically. In the same way, if you’ve been sitting on cash or highly liquid instruments, as interest rates rise, you could put your money to work with much better value."
The upside is that some experts believe in fact, a jump in rates may actually signal good news.
"The Fed is only going to be willing to move on interest rates if they are confident that the move won’t forestall economic recovery. The conventional wisdom is that if GDP growth and job creation are strong, then the Fed will likely start to raise rates. So, in effect, a rate rise is confirmation that the Fed believes that economic recovery is strong," says Johnson.
Here’s how higher rates could be a good thing.
"Rising interest rates strengthens the dollar. This initially helps with foreign travel, as the dollar will be much stronger, yielding much more purchasing power," points out Mike Pelosi, who studied applied economics and is a digital media specialist for CardBlanc, a shopping, payment and social app. "The country with the highest interest rates sees the best foreign investment prospects. This net foreign investment may create job opportunities for Americans in the domestic sense."
"An increase will give investors more stable vessels to park idle cash with low risk and add a marginally better return. What currently is being held in savings or checking accounts will be more likely to move off the sidelines and into CDs and high quality debt instruments as investors have been waiting a long time for a safe and stable return," says Ryan Monroe, a financial advisor with Edward Jones. "The key for investors, is to position their portfolios in an appropriate ladder for their income investments in order to not suffer large valuation impact, while still being able to capture the rising rates as they come."
Investors will be able to purchase U.S. treasuries that allow them to earn higher rates of interest, points out Levar Haffoney, principal of Fayohne Advisors.
Big benefits for banks
There are entire sectors of the economy that would profit from an increase in interest rates. "The financial services arena would have the most to gain, they will flat out make more money," says Robert Palidora, a financial consultant with AXA Advisors. A steady rise in rates will boost the banking sector, since the bank rates ride on top of the central bank rates. "As interest rates rise further, it will influence consumers to place their money back into banks, causing the banks to have higher deposits which will eventually translate into bank earnings that reflect in their stock prices. Higher stock prices therefore, mean higher earnings for the shareholders," says Victor Chiu, business development manager for Centaria Properties.
Savers score too
For the past seven years, money market and savings accounts have been terrible investments because of the low interest rates paid out. These are traditionally considered the "safest" places to keep money. "Higher interest rates should raise the value of these kinds of accounts for individuals who are risk-averse savers," says Trevor Ewen, a personal finance blogger for pearoftheweek.com.
Checking accounts should see higher yields too. "Right now, before the Fed has raised rates, Kasasa checking accounts are offering consumers yields up to 75 times higher than the national average of 0.04 percent APY. Switching to a high-yield checking account is an easy way to earn a little extra cash," says Gabe Krajicek, CEO of BancVue.
Savvy credit card users win
The credit card industry is so competitive that issuers are always looking for new ways to finance better incentive and rewards programs to entice potential customers. Says Robert Harrow, an analyst with ValuePenguin, a personal finance research website, "If credit card interest rates go up, it is possible that credit card rewards will increase with them. This is good news for consumers who pay their credit card bill in full each month. They will likely not see any of the negative impact of higher interest, but reap the benefits of more lucrative rewards programs."