What a Fed rate increase could mean

Someday the Federal Reserve and its Open Market Committee will raise the short-term interest rate it controls. That might be today, or in December.

The first increase is expected to be just a quarter of a point, and any further increases are expected to come slowly, so most economists aren’t expecting big ripple effects, and financial advisers say investors should stay their course — with a few tweaks.

▪ Mortgage rates aren’t likely to move much, because they are tied to the 10-year Treasury rate, and not to the short-term federal funds rate, which is what the Fed will increase when it moves.

When short-term rates rose in 2004-2005, long-term rates hardly moved. And although Beijing isn’t buying U.S. Treasuries as it was back then, private investors in Asia are. Since the Chinese stock market started diving in June, the 10-year Treasury rate has fallen from 2.50 to 2.2 percent.

Still, if you have an adjustable-rate mortgage, you could consider refinancing at a fixed rate before interest rates start creeping upward. Your monthly payment could go up, but you would be locking in a historically low rate.

▪ Car loans will get more expensive, as will bank fees. A higher Fed funds rate will increase banks’ costs, which they are likely to pass on in higher fees on checking accounts and other services, and higher rates for credit-credit cards, car loans and home improvements.

So if you’re thinking of buying a car or adding a rec room, it could pay to do it sooner rather than later.

▪ Conversely, savers should not lock into long-term CDs and other savings instruments at current rates, as they are likely to rise. Banks could start paying higher rates on 1- to 5-year CDs.

▪ U.S. economic growth should continue or even pick up. Higher interest rates usually have the opposite effect on growth, because they are raised to cool off a hot economy. But because households have cut their debt and low gasoline prices are helping other retail sales, the Fed, whenever it raises rates, will be banking on those factors moving the economy forward despite the effects of marginally higher short-term interest rates.

▪ Don’t try to time the stock market. This is always good advice for investors — as opposed to gamblers and speculators — and many analysts expect the U.S. economy to continue to slowly strengthen. After all, that’s why the Fed expects to move rates off rock bottom, whether today or later. And if the slow recovery continues, many analysts expect that removing uncertainty about when rates will to start to climb could actually help the stock market settle down.

This story was originally published September 17, 2015 at 7:38 AM with the headline "What a Fed rate increase could mean."