On December 14, the Federal Reserve announced that they were hiking the Fed Funds rate by 0.25%. This is the rate that financial institutions lend money to each other overnight and has a trickle-down effect other interest rates in the domestic economy.
This increase is indicative of a larger trend – it comes after an equal-sized interest rate increase in December 2015. Further, the Federal Reserve indicated in the announcement to expect 3 additional hikes over the next twelve months.
If each of the 3 hikes in 2017 will be of the same magnitude, then the year will finish at a 1.5% Fed Funds rate. This presents a dramatic change to our interest rate environment given that short-term rates have been held near zero since December of 2008 to provide economic stimulus.
Investors should make themselves aware of the effects that these rate increases may have on their portfolio, as interest rates have a large effect on the price of real assets.
This article will discuss the effects of rising interest rates on dividend stocks.