4 Reasons to Celebrate an Interest-Rate Hike

For the past several years, there has been a lot of hand-wringing about the scepter of rising interest rates--particularly among bond investors. Morningstar's director of personal finance Christine Benz recently sat down with investment expert Rick Ferri to discuss why rising interest rates could be cause for celebration. Below is an excerpt of their conversation.

Christine Benz: You recently wrote a thought-provoking blog post where you argued that rising rates could be reason to rejoice. Let's talk about some of the reasons why rising rates could be a good thing for investor portfolios.

Rick Ferri: I think that there are four reasons to rejoice over interest-rate increases--and by that I mean the Federal Reserve actually beginning to increase the fed funds rate, which right now is less than 0.25%.

First of all, there is such anxiety out there. It seems like every other story in the media, when something else isn't going on, is about when the Fed is going to increase rates. It seems like this fear of rising rates is actually holding down the economy. I believe that if we can just see a 0.25% increase--any kind of a rate increase so we can get it out--people will see that their bond portfolios are just fine. They didn't lose everything. They didn't go down in value and, therefore, the big anxiety is going to be relieved. It would really help the psyche of investors.

Read More: 5 Ways to Prepare for Rising Interest Rates

Benz: You also suggest that a rate increase could have some spillover effects that could stoke the economy.

Ferri: I think that when news gets out that the Fed has begun to raise interest rates, there is going to be a boost to spending because a lot of people may have been holding back buying a home or making another significant purchase. The news that the Fed has increased interest rates, even though they haven't been increased by very much, might cause people to say, "Let's go buy that house," or, "Let's go buy that condo--let's do it now because interest rates are going up." We may see is a boost in the economy by some small percentage of GDP because interest rates are now going up and, therefore, now you need to go out there and borrow money while rates are still low and get done what you need to get done.

Benz: The beginning of the end of the "war on savers" could be another potential positive.

Ferri: This whole recovery, our keeping interest rates at almost zero percent, has been borne on the backs of people who live on fixed incomes. If you are living off CD or other short-term income, you paid the price for this economic recovery. By finally raising interest rates a little bit, the Fed gives these people some relief. Retirees, in particular, will be able to start to see more income, and they'll feel relief. And relief on the consumer level is good for the economy.

Read More: Your Plan for Rising Interest Rates

Benz: Finally, you think that raising interests will, as you put it, give the Fed its hammer back. Let's talk about that.

Ferri: The Fed has certain policy tools that it can use when we go into a recession to try to stimulate the economy. One of the big tools they have is lowering interest rates. But we are already at zero. As a result, that big tool is gone. The Fed can't lower rates. By raising rates sooner rather than later, the Fed would be able to lower rates if we start moving into a slowdown in the economy. The Fed needs to get back there. It needs to get its hammer back.