The Sound and The Fury... and The Fed

William Faulkner’s 1931 novel, The Sound and The Fury, is one of those books you may have suffered through in high school or college. I say “suffered” because Faulkner uses a literary device known as stream of consciousness, which means he put down on paper whatever came into his head.

And the Federal Reserve--the brainiacs who control certain short term interest rates--have been doing the same thing for seven long years now while the media has trumpeted every word PLUS a whole bunch of useless commentary and speculation.

Until today.

Today, they’re supposed to actually do something about all the stuff they’ve been talking about all this time.

So what are they’re supposed to do?

Raise rates by one-fourth of one percent which, in the overall scheme of things, is next to nothing.

So let me put this in perspective for you.

If you buy a home by borrowing $400,000 at 4% for 30 years, you’ll be making principal and interest payments of $1,910 a month.

But what if rates go up a quarter point?

That payment goes go up too, but only by $58.

So all of this sound and fury signifies next to nothing for the average physician family.

But what if they keep on raising rates, and we go back to the uber-high rates of the 80’s, when Paul Volcker was the fed chair, mortgage rates peaked at 18.4%, and I was still spiking my hair to get ready for the sixth grade dance?

We can get some idea of how fast rates might change by looking back from here.

Over the past 34 years, mortgage rates have fallen by an average of 0.4% a year.

That’s it. Just a tiny bit.

So we might reasonably expect rates to rise not by FIVE percent this year, but by ZERO POINT five percent (0.5%) next year, or 1% at worst.

And with this said, this prospective news has been so loudly broadcast for so long, you might reasonably expect that everyone has heard it already, such that it’s already fully baked into the economy.

So what should you do?

First, don’t panic. Things will change but they’ll change slowly.

Older physicians should take a look at their investments. If you’ve been holding on to long-dated treasuries, they’re likely to get nailed when rates rise, so move to a shorter duration while you have the chance.

Younger physicians--particularly those who are new to practice--should take steps to convert variable interest rate debt (a,k.a. student loans) into fixed rate loans by refinancing or renegotiating terms.

And last but not least, if you’re thinking about buying a home, DON’T rush the process. As I said, the increase in rates will have a miniscule impact on your payments BUT buying a house in a hurry is a surefire way to make one of the top ten mistakes we are asked to fix for physicians.

Remember what Faulkner said. “Don't bother just to be better than your contemporaries or predecessors. Try to be better than yourself.”