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U.S. Investors Taking Higher Interest Rates in Stride

U.S. Investors Taking Higher Interest Rates in Stride

Story Highlights

  • More than seven in 10 say no positive or negative impact on their finances
  • 67% say higher rates won't alter investment choices
  • Investors say lower rates better for them personally

WASHINGTON, D.C. -- Before the Federal Reserve's decision Wednesday to raise interest rates for the third time in a year, U.S. investors reported that higher interest rates have had little impact on their finances. Slightly more than seven in 10 investors say they have noticed no discernible effect on their finances, or that the effects have been mixed or neutral. The remainder divide evenly between describing the effects as positive or negative.

Relatively Few Investors Say Higher Interest Rates Affecting Their Finances
As you may know, the Federal Reserve has increased interest rates twice since last year. Have these rate increases had any impact on your investments, loans or any other aspect of your finances that you've noticed?
Yes, positive impact Yes, negative impact Yes, neutral/mixed impact No impact
% % % %
13 14 5 66
Wells Fargo/Gallup Investor and Retirement Optimism Index, May 4-7, 2017

The results are based on the most recent Wells Fargo/Gallup Investor and Retirement Optimism Index survey, conducted May 4-7 with 1,005 U.S. adults who have at least $10,000 invested in stocks, bonds or mutual funds.

The survey was conducted before the Fed announced a quarter-point rate hike on Wednesday, the latest in a series of increases the central bank has made since 2015. The Fed indicated it may raise rates again later this year.

Ahead of Wednesday's rate increase, investors seemed largely unfazed by the possibility of further rate hikes. Two-thirds of investors say they would not plan to change their investment choices if interest rates continued to rise. However, 23% indicate they would look to transfer some money out of stocks into interest-bearing accounts.

Most Investors Plan to Stay the Course With Investments Amid Higher Interest Rates
If interest rates do continue to rise this year, which of the following are you most likely to do as a result -- [ROTATED: transfer some money out of stocks and into interest-bearing accounts, not make any changes (or) put money into the stock market]?
Transfer money out of stock market Not make any changes Put money into the market
% % %
23 67 8
Wells Fargo/Gallup Investor and Retirement Optimism Index, May 4-7, 2017

For the most part, investors are confident they understand the implications of interest rate changes for their investments. Seventy-six percent agree and 21% disagree that they have a good understanding of how higher rates would affect their stock investments.

Investors did indicate some worry about further interest rate hikes having a negative effect on their investments over the next year -- 10% are "very worried" and 35% "somewhat worried," but this still represents a minority of investors. On a relative basis, investors worry less about interest rate increases than about other factors that might harm their investments.

Investors Worry Less About Higher Interest Rates Than Other Factors That Could Affect Investments
How worried are you that each of the following may have a negative impact on your investments in the coming year? Are you very worried, somewhat worried, a bit worried or not worried at all?
Very worried Somewhat worried Very/Somewhat worried
% % %
The various military and diplomatic conflicts around the world 44 31 75
The political climate in Washington 45 24 69
The performance of the U.S. economy 11 38 49
Inflation 12 36 48
Further interest rate hikes 10 35 45
Wells Fargo/Gallup Investor and Retirement Optimism Index, May 4-7, 2017

Most investors are also not concerned about the implications of higher interest rates on the amount of debt they currently carry -- 77% say they are comfortable and 21% uncomfortable with the amount of debt they have accrued in recent years, when rates were low.

Investors Say Lower Rates Better for Them Personally

In the May survey, 66% of investors said they were satisfied with current interest rates, while 31% were dissatisfied. Those opinions largely mirror investors' perceptions of which situation is better for their own finances -- 26% say higher interest rates are better for them, while 69% say lower interest rates are.

Lower interest rates are advantageous for consumers seeking to borrow money to purchase a home or a car, or for other purposes. But higher rates benefit investors with fixed-income investments like savings accounts or bonds, who see higher yields when interest rates are high.

Retirees often have a greater proportion of savings in fixed-income investments. Consistent with this, retirees (39%) are more likely than nonretirees (21%) to say high interest rates are better for them, personally. But even the majority of retirees, 52%, prefer low rates.

Retired and Nonretired Investors Both Prefer Lower Interest Rates
Overall, which would be better for your financial situation today?
High interest rates Low interest rates
% %
All investors 26 69
Retired 39 52
Not retired 21 76
Wells Fargo/Gallup Investor and Retirement Optimism Index, May 4-7, 2017

Implications

After lowering the federal funds rate to almost zero following the Wall Street financial crisis in 2008, the Federal Reserve Bank has slowly but steadily raised interest rates in recent years as it judged that the economy was healthy enough to support such increases. Interest rates remain low on an absolute basis, and that may be one reason most investors are unconcerned about the effects rate hikes will have on their investments and their personal finances more generally. This, combined with a strong stock market, helps explain much of investors' current psychology. As long as the market remains strong, investors will be in no hurry to trade the potential of healthy returns in the stock market for the security of interest-bearing accounts like saving accounts and CDs.

Also, investors still in the stock market today -- a lower proportion of Americans than existed before the recession -- may be confident enough in the long-term performance of stocks that they are willing to ride out occasional downturns or potential threats to short-term stock performance.

With most investors planning to leave their stock investments alone, those investors will continue to benefit from a strong market, if it persists. Interest rates do not directly affect stock values. However, interest rates can influence companies' profits and their willingness to borrow money to expand their businesses, which can drive down their stock values. If enough companies are affected by higher interest rates, then stocks will become a less attractive investment.

Survey Methods

Results for the Wells Fargo/Gallup Investor and Retirement Optimism Index survey are based on telephone interviews conducted May 4-7, 2017, on the Gallup Daily tracking survey, with a random sample of 1,009 adults with investable assets of $10,000 or more. For results based on the total sample of investors, the margin of sampling error is ±4 percentage points at the 95% confidence level. All reported margins of sampling error include computed design effects for weighting.

Each sample of national adults includes a minimum quota of 70% cellphone respondents and 30% landline respondents, with additional minimum quotas by time zone within region. Landline and cellular telephone numbers are selected using random-digit-dial methods.

Learn more about how the Wells Fargo/Gallup Investor and Retirement Optimism Index works.

Gallup


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