Interesting developments: the investment implications of rising interest rates.

• Author: Lee, Sean P.
• Position: Money Talk

Interest rates are on the rise, and many Americans are wondering what that means for them. While borrowers could be hurt by higher rates, those who are retired or close to retirement could benefit from them.

But how did we move from record-low interest rates to rising interest rates? It has a lot to do with the Federal Reserve.

Onward and Upward

As a result of the recession in 2008, the Federal Reserve kept interest rates at historic lows. By lowering interest rates, its goal was to make credit less expensive for households and businesses, improving the economy through a surge in spending. The Fed has also put more money into the banking system by purchasing billions of dollars worth of mortgage-backed securities; it's now in its third round of this "quantitative easing," or QE3. This, too, kept interest rates low.

Since the beginning of May, interest rates have risen steadily with an improving economy. Strengthening economic indicators such as employment, inflation and growth are the prerequisite for ending the Fed's record-low rates and QE3.

In June, Fed Chairman Ben Bernanke suggested that the Fed could begin tapering its bond-buying program as early as September. That announcement caused interest rates to rise due to speculation about the Fed's actions. But in a surprise move at the conclusion of September's Federal Open Markets Committee (FOMC), Bernanke announced that the program would continue as is. He said that the economy was not yet strong enough for a change, but emphasized that conditions were improving and that tapering was only postponed, not canceled.

The FOMC will meet in mid-December, at which point tapering could begin.

Prior to the Fed's September meeting, rates for 30-year fixed-rate mortgages had reached 4.7 percent, the highest rate since spring 2011. After the Fed's announcement, interest rates declined. By the end of September, the average rate for a 30-year fixed-rate mortgage was below the 4.5 percent level. Despite this drop, rates are more than a full point higher than they were at the same time last year and have the potential to keep increasing.

Smart Money

The most basic result of higher rates is that it will become more expensive to borrow money. Even a 1 percent increase in your mortgage rate can mean tens of thousands of dollars more out of your pocket throughout the life of the loan.

Although interest rates are higher than they were a year ago, they are still fairly low compared to rates a few years ago...