Last week the Federal Reserve chose not to raise interest rates and the markets reacted, by going up. If you don’t follow the stock market, or the Fed, you probably didn’t even notice. The markets do this a lot. Since there was some expectation this would happen, there’s already been some down days and up days since the Fed’s decision — in essence run-of-the-mill short-term market fluctuations that shouldn’t worry you if you’re a long-term investor. When the Fed does take action, however, it can have an effect on the markets, the economy as well as the price you pay for goods, services, and even financial products.
I was featured in a video by Circa News last week discussing the Fed’s role using a metaphor I promise will be as un-boring as possible. The Fed is like the driver of a “car” — i.e. the economy. It’s job is to make sure the car moves along at a safe and steady speed.
Check out the video from Circa News to learn more:
— Circa (@Circa) September 21, 2016
Here are some examples of what might happen if / when the Fed chooses to raise interest rates the next time they meet:
- Banks may increase mortgage rates slowly based on the Fed raising the discount rate (the discount rate is the only interest rate actually set by the Fed, and it’s a minimum rate banks charge to lend to other banks).
- Interest rates on your savings accounts may go up slowly, but probably not immediately
- It might mean that prices (inflation) has increased — since this is one of the main indicators the Fed tries to control. Raising rates has the effect of limiting price inflation.
- It may mean the economy has sped up more than anticipated and employment numbers continue doing really well.
- Cost of capital / borrowing as a business owner may increase slightly
- Rates on credit cards could increase
- Bond prices in your portfolio will likely go down some
I think it’s important from a financial literacy perspective, for consumers to have a general understanding of these types of things. However, if you don’t have time to read The Economist, your financial advisor will consider these things when working out your financial and investment plans, saving your brain to focus on things that bring you more joy. Check out the full article from Circa here – “Here’s what you need to know about the Federal Reserve but didn’t know to ask.”
What was the most interesting thing you learned from the video?