What the Fed Interest Spike Means for You
We are seeing the biggest and fastest jump in interest rates since 1994 and there may be more increases ahead. The question on many peoples’ mind is “Why is this happening?”
The Federal Reserve (“the Fed”) sets the Fed Funds Rate which is what dictates the cost of the shortest-term financing. It raises and lowers the rate to try to persuade inflation and employment to stay within certain ranges. For example, reducing rates is an attempt to stimulate the economy and increasing rates is a way to combat inflation.
At the beginning of the pandemic, financial markets were in disarray and the Fed made an assumption that covid-driven inflation would subside as the pandemic started to diminish. However, inflation due to the pandemic has not subsided and by the Fed’s own admission they miscalculated the health of the labor market and inflation’s persistence.
Despite a .25 point rate increase earlier this year and another .50 point increase this week (the first since 2000), there are likely more increases to come. It is anticipated that the Fed will make half point increases in June. Here is what it means for you.
Higher rates can be good or bad depending on your financial situation. If you are a saver, you are likely well-positioned. Although savings vehicles will not jump overnight, higher federal funds rates will increase competition between banks resulting in benefits for consumers. If you are someone looking to borrow funds for major purchases, like a home, business, or college education, then the increased rates could adversely impact the amount you need to budget to repay the loan; thereby, making your debts more expensive.
Increasing your savings and staying focused on your long-term investing strategy despite the volatile market will help you. Federal funds rate increases will affect everyone, but you may be able to gradually adjust to the new market environment by starting to prepare early. If you have questions about how this will affect your financial goals or investments, we can help you with long-term solutions.
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