For Mark Roberts’ Use: In December, the Fed finally moved ahead with the interest rate hike that had been promised all year. Overall, this is a good sign, as interest rates have remained low for nearly a decade following the economic crisis of 2008 and the Great Recession. An interest rate hike is a sign of an improving economy, which of course benefits us all.
Why do they raise rates? You might wonder why the Fed would respond to positive economic news by raising interest rates. The full explanation could become much too complicated for this blog, but the simple answer is that raising rates can help control inflation and support our economic strength. When the Fed lowers rates, it’s a sign that the economy is contracting. Increasing rates indicates that the economy is growing.
Basically, they want to encourage employment to keep growing while also preventing inflation from getting out of control. The goal of the Fed is to keep the inflation rate at about 2 percent.
How does this affect me? It’s one thing to investigate and understand complex, national economic matters. But for most people, the real concern boils down to: How does this affect me? The answer is that rising interest rates can carry both positive and negative impacts for any individual.
If you have money in the bank, obviously you can expect those funds to grow a little faster under higher interest rates (assuming you place the money in an appropriate growth vehicle). Rising rates, in many cases, is good news for investors who balance their portfolios appropriately. But of course, if you borrow money you will also be paying more interest. With rates expected to rise at least once more this coming year (and possibly several more times, depending on how the economy performs), you might be wise to consider that forecast when making decisions about borrowing.
As always, you should continue to consult carefully with a financial planner when analyzing the impact of economic conditions. So give us a call, and we can help you decide how these events might affect you.