Now that the Fed has begun raising interest rates, there remains confusion among the public surrounding which rates will move higher. There are many interest rates tied to various lending, savings, and investment vehicles – not all are affected by the Fed.
Immediate Impact – The swiftest change will be to certain loans, particularly variable rate and revolving credit lines. Home equity loans, credit cards, auto loans, and adjustable rate mortgages may see rates rise immediately. Many of these loans are tied to the prime rate or LIBOR, both of which are closely related to the short-term interest rate targeted by the Fed.
Delayed Impact – A delayed effect will be seen in many savings vehicles. Banks may eventually raise rates on certificates of deposit, and checking and savings accounts – but are not required to. Indeed, rates on these vehicles may remain low for many years. Money market funds may offer higher yields, but not until their underlying investments mature and higher yielding paper is purchased. Short-term bond mutual funds may offer higher dividends over time.
Modest Impact – Many bond investments will see a modest impact. The Fed does not control long-term interest rates, which are mainly driven by expectations for economic growth, inflation, and supply/demand forces. Longer-term treasury and municipal bonds are affected only indirectly. Even further removed from the Feds influence are corporate bonds, including the high yield sector, which are influenced more by the overall economic environment and corporate fundamentals.