It’s been a little over a week since the Federal Reserve (or the Fed) announced it would not raise the interest rate as so many in the investment world were anticipating. As a result, markets are down. In fact, since the market closed on September 17th (the day of the Fed’s announcement), the S&P 500 is down 3%.
What is this “Interest Rate” you speak of?
Why it’s The Federal Funds Rate of course! This is the rate charged by banks when they lend “overnight” money to other banks. Banks are very particular about how much cash they keep on hand, so they borrow from other banks to keep their numbers tidy. This rate typically affects what interest rates banks set on savings accounts and loans. So, an increase in the Federal Funds Rate, would likely mean an increase in all interest rates.
Why raise it?
So, why is the Fed considering raising the interest rate. This rate is currently set at 0.25% and hasn’t budged since it was lowered to that level on December 16, 2008. Does 2008 ring a bell? That’s when the last big stock market crash happened and we found ourselves smack in the middle of the Great Recession. People and businesses don’t like to borrow money when the economy is in the tank. So, to encourage borrowing, which tends to accelerate economic growth (at least in the short-term), the Fed dialed down the rate. The idea was to get the economy back on track as quickly as possible. But, the Fed is playing with fire. If they keep the interest rate too low for too long, a back-draft of inflation can ignite causing prices to climb and consumers to stop spending, suffocating the economy.
So what does this non-move mean for you?
Well, for the typical investor, this shouldn’t mean too much. Yes, markets fell after the announcement, but that was a short-term reaction. Don’t sell! Just hold on and don’t panic. The key to long-term investing is not reacting to the news of the day. It’s probably only a matter of time before the Fed does crank up the rate. But, no one can say for sure what time that will happen. So for now, just keep your hands in your pockets.
What happens when rates do finally go up?
When rates go up (and they will), savers will rejoice and borrowers will lament. Rates on savings accounts and some investment accounts will likely go up. Rates on mortgages, car loans, student loans, and credit cards will also likely go up. If you currently have a loan or two outstanding and the interest rate is fixed, you’ll be fine. But if you have an adjustable rate, watch out! Likewise, if you have lot’s of money in a long-term fixed-rate CD, you’ll probably kick yourself because your rate won’t budge. But, if you own a liquid savings or money-market account, you might start seeing your rates inch back up above 1%. Wouldn’t that be amazing!
Are you at all concerned about rising interest rates?