Interest rates are rising – what it means for your bank account
In mid-March, the Federal Reserve announced that, for the first time in three years, it was raising interest rates by a quarter of a percent (0.25%). Although this is an expected decision, it will still cause changes in the financial landscape as we know it.
To understand how rising interest rates can affect you personally, you must first understand what we mean when we talk about federal interest rates.
What is meant by interest rate?
When we talk about the Fed, we are referring to the federal government, specifically the Federal Reserve in this case. When you hear the phrase “The Fed is raising rates,” it actually means that the Federal Reserve is changing its target for the federal funds rate, which is the suggested rate used by the FOMC (Federal Open Market Committee). This rate, set by the FOMC, determines what commercial banks must charge when they lend money to other banks. Banks then take their excess reserves and keep a percentage of them to cover deposits and lend the excess to each other in what is called the overnight market. It’s not a mandate that banks do so, or a mandate of the exact rate they can charge, it’s just a suggestion, and what follows is a negotiation – but most banks follow these guidelines set by the FOMC and the federal funds rate.
What is the impact of the rate?
The federal funds rate has an impact on inflation. The federal government has a mandate to keep inflation within the 2-3% range, or what they call stable prices. The government considers inflation of 2% to 3% to be healthy and stable inflation, and when inflation is above or below this amount, the federal government can use accommodative or restrictive monetary policies in order to bring inflation back down. inside the fork. target range. Adjusting the fed funds rate is often their first choice to manipulate the rate of inflation.
Lowering the federal funds rate is a tool the government has used when inflation is low and the economy needs a boost. We have seen them use it to support the economy during recessions and at the start of the pandemic. In March, inflation hit 8.4%, more than double the target range. Therefore, the federal government is preparing to raise interest rates, which is a restrictive monetary policy aimed at slowing the flow of money in the economy. With less silver in circulation, this will discourage a sharp rise in prices.
How do rising interest rates affect you?
This interest rate hike is somewhat expected, and we also expect the Fed to continue raising interest rates in the remaining six meetings this year. Although the current increase is 0.25%, with the additional increases we could be looking at a 2% increase by the end of the year.
It will affect your finances if you have anything in a variable rate vehicle, such as credit cards and variable rate loans, including auto loans and variable rate mortgages. If you can lock in a long-term rate, you might want to do it now, when rates are lower (relatively), rather than later, as they may rise to adjust your timing.
Other possible effects of higher interest rates:
- One would expect house prices to fall.
- Bond yields will likely rise and bond prices will likely fall.
- As a general rule, any financial item tied to an interest rate will be decently higher by the end of the year.
- Your savings account rates should also increase during this time, so you can earn more interest on your savings account, especially if you switch to an online-only bank with a higher interest rate. .
Much of the market reaction we’ve seen this part of the year, outside of the Ukraine invasion, has involved revising interest rate expectations. The Fed has indicated that more interest rate hikes are coming, so we can expect additional volatility. Investors should remember that the market has ups and downs and investing is a long-term strategy. This is where a financial advisor can help, as they can help investors counter their own behavioral biases and avoid making hasty decisions.
Working with a financial planner is always a good idea, as they can help you plan what’s to come in the markets regardless of whether interest rates rise or fall.
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President, Partner and Financial Advisor, Diversified, LLC
In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of experience in the financial sector. As a financial planner, Andrew forges lasting relationships with clients, supporting them through all stages of life. He obtained his Series 6, 7 and 63, as well as P&C and Health/Life insurance licenses.