Should Investors be Worried About the Rate Hike?

This week is the run-up to the Federal Open Market Committee's long anticipated, fairly certain rate increase.

investorsThis week is the run-up to the Federal Open Market Committee’s long anticipated, fairly certain rate increase—as certain an anything can be in predicting Fed behavior. Will it matter to investors? Opinion is mixed, from calling it a much ado about nothing moment to characterizing the increase as the pinprick that starts to pop a few bubbles (commercial real estate’s a favorite choice for that still hypothetical bubble). On Monday, Gallup released the results of a poll of investors that found that they’re not overly concerned about the increase as far as their own finances are concerned, but worry that it might be bad for the overall economy.

Gallup’s definition of “investor” is fairly broad. The survey was based on questions asked Oct. 30-Nov. 8 of a random sample of 1,018 U.S. adults having investable assets of $10,000 or more. Within those parameters, 54 percent of investors say an increase in interest rates wouldn’t make much difference to their own financial situation, while another 16 percent believe higher rates would be good for them. About three in 10 say higher rates would be bad for them. Higher interest rates are more likely to be bad for those who intend to borrow—especially large loans, like mortgages—or those paying off adjustable-rate mortgages, rather than non-borrowers.

In terms of the direct impact of higher interest rates, more respondents believe they stand to gain from interest earnings on savings than expect to be hurt on loan costs. Specifically, 51 percent expect to see more income, while 39 percent say these rates will increase the cost of an existing loan. As for more indirect impacts, 47 percent say higher rates will make it harder for them to sell a home (which might have implications for the residential market), while 35 percent of investors see higher rates as an opportunity to transfer money out of the stock market and into less risky investments (net lease properties, for example).

By contrast, the respondents weren’t so sure about how new rates will play out in the wider economy, a fact that might affect consumer confidence and thus some important aspects of the economy, such as consumer spending. Forty-eight percent believe raising rates right now would be bad for the economy, compared with a slender 19 percent who say it would be good for the economy. Thirty percent say it would make no difference.