The Interest Rate Mystery

October 26, 2016

We’ve heard the chatter for years now; “interest rates can only go up.” Investors have kept a close watch on when rates will rise to more normal levels. The expectation has been that once the U.S. economy can stand on its own two feet, it will no longer need the assistance of ultra-low rates.

At some level, the majority of people are affected by interest rates. Those applying for a mortgage or financing a car may have the potential to save thousands. However, those looking to be rewarded for their years of saving are stuck waiting and searching for yield. That impact is certainly felt by retirees. The less they receive in interest and earnings, the less they can afford to take from their savings.

So, that leaves us with two key questions:

When will interest rates go up? and What options do I have in this type of environment?

Honestly, a series of books, rather than a blog, would be required to discuss all of the economic factors and monetary policies impacting the timing of interest rates.

To start, the Federal Reserve controls the target range for the federal funds rate. This is the rate applied to banks who borrow and lend overnight funds, allowing the banks to maintain proper cash reserve requirements.

Essentially, this rate acts as the basis for all other interest rates in the U.S. economy. The lower the federal funds rate, the lower all other interest rates will be. The rate had not been raised in seven years, but was increased from its lowest possible range just under a year ago, in December of 2015.

The current debate is whether the Federal Reserve will raise the rate again in December of this year. The Fed will be watching both unemployment and inflation levels, two key numbers that give grounds to increase rates. Having said that, even if rates are raised, it will likely result in just a modest increase in the interest rates seen by consumers and savers.

To tackle our second question, there are limited options when looking for yield from low risk products – CDs, Money Markets, and savings accounts. Some individuals have taken on heightened risk by investing in dividend paying stocks. There are alternative insurance products that can provide competitive yields when compared to other lower risk products, but the cost and fine print must be understood.

For retirees, or those within 10 years of retirement, there is hope. Hope in putting a plan together that manages growth potential, risk, and liquidity. The balancing act is to achieve those while getting consistent monthly income and leaving emergency cash reserves. The net result is making the best of a challenging environment.

If you, or someone you know does not have any retirement plan, the time to start is now. The earlier you start to plan, the better, and Kemp Harvest Financial Group can help you do just that. Please feel free to contact us at our Harleysville office to begin your retirement process! 


The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.